As blockchain and cryptography advance, we are faced with a delicate challenge – how can we design systems that protect user privacy while still allowing for necessary compliance and regulation? In his talk (slides, video), Pablo Kogan from QEDIT explored this dilemma and presented some innovative approaches that aim to strike the right balance.
Privacy and Compliance lie on a spectrum
Pablo started by framing the issue on a spectrum – at one extreme, we have fully transparent systems like traditional databases, where user data is decrypted and exposed to execute operations. At the other end, we have fully opaque and private systems like Monero and Zcash, where transactions reveal virtually no information. The goal, he argued, is to find a middle ground – systems that provide meaningful privacy guarantees while still enabling compliance where needed.
He presented two potential paths to reach this middle ground – start with a transparent system and add selective privacy, or start with an opaque system and layer on selective compliance mechanisms. Using the example of Zcash’s Orchard protocol, he discussed an approach for the latter – enforcing “viewing keys” that would allow authorized entities like regulators to decrypt and view transaction histories, but only when necessary and with proper safeguards. This could be achieved through techniques like verifiable encryption and provable granularity of disclosure.
Blacklists, Traceability and Privacy Budgets
Another avenue he explored was the idea of blacklists and whitelists. A blacklisting system could allow authorities to temporarily freeze funds from suspicious addresses. The sender would then need to provide a cryptographic proof that their address is not on the blacklist before the transaction is permitted. Careful consideration would be needed around aspects like who controls the blacklist, whether canonical or re-randomized addresses are blacklisted, and effective circumvention.
In a different vein, Pablo discussed an approach focused on “traceability” rather than blacklisting. Here, the aim is to prove that funds didn’t pass through any malicious entities or “hops” retroactively defined by authorities after the fact. This could be achieved by cryptographically enforcing the inclusion of canonical identities within encrypted transactions, making the transaction trail auditable without compromising privacy.
A distinct concept presented was that of a “privacy budget”. Inspired by proposals like UTT (Unspent Transaction Tree), this involves providing users with a daily privacy allowance token. Small transactions up to the budget can remain fully shielded, while larger ones exceeding it would be auditable. This models the current cash vs banking system paradigm in the digital realm.
No “one-size-fits-all” approach!
Importantly, Pablo emphasized there is no universal solution. Different jurisdictions and use cases will demand different levels of privacy and compliance. He advocated for a real-world testing methodology, where protocols are iteratively refined based on practical experience. This could involve launching test blockchains with various configurations, multiple shielded asset pools with different feature sets on the same chain, or even specialized shielded pools isolating assets with particular compliance properties.
The talk highlighted the nuances involved in blending privacy and compliance. There are technical challenges around efficient cryptographic proof systems, key management, and modeling different use cases. But there are also policy considerations – who holds the keys, who defines blacklists and audit requirements, and how to fairly provision privacy budgets.
As blockchain and digital currencies gain traction, it will become increasingly important to navigate these complexities. Pablo’s proposals provide a thoughtful framework, leveraging cryptography and selective disclosures to find the sweet spot between confidentiality and accountability. The next steps will be iterative real-world experimentation and ongoing dialogue between technologists, businesses, and policymakers to shape inclusive and balanced solutions.
