Vitalik Buterin co-authors paper on regulation-friendly Tornado Cash alternative

Ethereum ETH -4.47% co-founder Vitalik Buterin co-authored a research paper focused on a privacy protocol called Privacy Pools with core developer Ameen Soleimani, researcher Jacob Illum from analytics firm Chainalysis, and academics Matthias Nadler and Fabian Schar. With what could be a potential alternative to the troubled Tornado Cash, they posit that financial privacy can co-exist with regulation. 

The authors describe the new platform as "a novel smart contract-based privacy-enhancing protocol" designed to enhance transactional privacy on blockchains. Privacy Pools aims to leverage zero-knowledge proofs to determine whether user funds originated from lawful sources without revealing the complete transaction history.

Financial privacy and regulation: a dual approach

The primary goal of the project is to create what the authors describe as a "separating equilibrium." Simply put, the system aims to filter out funds linked to criminal activities while striving to find a balance between privacy and regulatory requirements.

"The core idea of the proposal is to allow users to publish a zero-knowledge proof, demonstrating that their funds (do not) originate from known (un-)lawful sources, without publicly revealing their entire transaction graph," read the paper’s abstract.

The authors argued that financial privacy and regulation can co-exist. They cited Tornado Cash as a useful privacy tool, but acknowledged its susceptibility to misuse by illicit actors.

Tornado Cash faced legal difficulties last year over allegations that it facilitated transactions for the North Korea-linked hacking group Lazarus. In August 2022, Tornado Cash was blacklisted by the U.S. Treasury Department’s Office of Foreign Assets Control due to its alleged involvement in illicit activities.