Privacy-Preserving Compliance: A Cryptographic Framework for Selective Disclosure in Regulated Markets

Abstract

Compliance verification in regulated markets requires that verifiers obtain confidence in an entity's regulatory status before making downstream decisions. The conventional resolution of this requirement is full disclosure of underlying evidence to each verifier on each verification occasion, with substantial cost to the entity's informational privacy and substantial duplication of sensitive-data storage across verifier organisations. Modern cryptography offers, in principle, the tools to better balance verifier information needs against entity privacy: zero-knowledge proof systems, selective-disclosure credentials, vector commitments, and privacy-preserving aggregation primitives are now mature enough for serious regulatory consideration. Yet the legal and regulatory frameworks under which these tools would be deployed have not caught up with their technical readiness. We develop the legal and policy case for adoption of a cryptographic framework for selective disclosure in regulated markets. We analyse the framework's interaction with data-protection law (UK GDPR, EU GDPR, US state-level privacy regimes), financial-services regulation (FATF Recommendations, FCA rules, BSA/AML obligations), employment law (right-to-work, employment background screening), and identity system regulation (eIDAS 2.0, US REAL ID, digital identity wallets). We identify the principal legal uncertainties that constrain adoption and propose specific reforms to resolve them: data-protection safe harbours for cryptographic verification protocols; reconceiving regulatory data-retention requirements in terms of cryptographic attestations rather than underlying evidence; standardising regulator-grade revocation mechanisms; clarifying the legal status of zero-knowledge proofs as admissible evidence in supervisory and enforcement actions. We make four policy recommendations: (i) data-protection regulators (ICO, EDPB, equivalent) should issue guidance affirming that cryptographic selective-disclosure protocols meeting specified properties are compliant with data-protection law; (ii) financial-services regulators should issue guidance clarifying that cryptographic attestations satisfying specified properties can substitute for evidence retention obligations under AML/KYC rules; (iii) standard-setters should coordinate cross-jurisdictional protocol standards through W3C, IETF, and ISO/TC 307 with regulator participation; (iv) legislators in jurisdictions with active digital-identity programmes (UK, EU, US, Singapore) should ensure that statutory frameworks accommodate selective-disclosure verification. The paper contributes to the law-and-economics literature on data sharing under privacy constraints, to the policy economics of RegTech, and to the legal-academic literature on emerging-technology regulation. It complements the technical and economic threads of work developed in companion papers in this series.