Blockchain Privacy and Self-Regulatory Compliance: Methods and Applications

Abstract

New advancements in zero-knowledge proof construction, including improvements in user experience, have made blockchain-based privacy applications more accessible than ever.However, additional measures are required to balance the needs of regulators, the basic privacy rights of users, and the constant threat of bad actors.To address these issues, privacy protocols can introduce features designed to increase transparency, encourage compliance, and prevent illicit use.In this paper, current privacy-preserving methods (privacy pools) are explained along with compliance measures designed to prevent illicit usage.These measures are divided into three broad categories: general restrictions, such as transaction limits, deposit quarantine, and geoblocking; selective disclosure, such as privacy-preserving KYC, proof of innocence, and opt-in reporting; and threat identification and prevention, including AML wallet screening.Each of these methods are described in detail along with examples of three privacypreserving protocols (Hinkal, RAILGUN, and zkBob) which utilize varying combinations of these methodologies to achieve privacy informed by selfregulatory compliance.