Ethereum co-founder Vitalik Buterin has co-authored a new research paper exploring how a privacy-preserving blockchain protocol could balance the need for user anonymity with regulatory compliance.
The paper, co-authored by Buterin along with early Tornado Cash contributor Ameen Soleimani, Jacob Illum from the blockchain security firm Chainalysis, and two researchers from the University of Basel, delves into the subject of establishing a neutral infrastructure to incorporate privacy into blockchain transactions.
It builds upon the concept of the Privacy Pools protocol, introduced by Soleimani in March 2023. This protocol, a fork of Tornado Cash, aims to improve its model to include regulatory compliance.
Privacy Pool operates similarly to Tornado Cash by mixing multiple user transactions to obscure their true origins. However, when users choose to withdraw funds, they have the option to generate a zero-knowledge proof.
The zero-knowledge proof confirms that they are not utilizing a criminal blockchain address while safeguarding their identity.
The new research paper seeks to strike a balance between Privacy Pool-like protocols and compliance with various regulatory and practical considerations by covering various hypothetical use cases.
Soleimani commented on the paper that they did their best to explain “how Privacy Pools tech can serve as neutral infrastructure for bringing public blockchains into regulatory compliance—across jurisdictions.”
The researchers “describe the infrastructure on top of, and the consequences of, this simple core mechanic,” the article read.
Building regulatory compliant privacy
A crucial topic of discussion revolves around the creation of “association sets,” representing a group of wallets connected via zero-knowledge proofs.
The researchers introduced the concept of association set providers (ASPs), tasked with generating association sets.
An excerpt from the paper states that, “In some instances, ASPs can be entirely constructed on-chain, requiring no human (or AI) intervention. Alternatively, ASPs may independently generate association sets and subsequently publish them on-chain.”
The researchers also address centralization concerns in pool management while striving to maintain regulatory compliance.
Furthermore, the authors have sought insights from legal experts to assist in tailoring the protocol and its surrounding ecosystem to “ensure compliance across various legal jurisdictions.”
Tornado Cash, a coin mixer, was sanctioned by the U.S. government last year over allegations that it facilitated transactions for the North Korea-linked hacking group Lazarus. The Federal Court reaffirmed the sanctions in a recent ruling.
The U.S. Department of Justice recently charged two founders of the Ethereum-based application with money laundering charges and arrested one of the co-founders.