Unpacking Privacy Pools: Can They Ensure Compliance? 

Unraveling the complexities of ‘Privacy Pools’ and its potential impact on the future of secure and private crypto trading.

Vitalik Buterin observing an iridesent turnado in virtual space.
Created by Gabor Kovacs from DailyCoin
  • ‘Privacy Pools’ aims to harmonize user privacy with regulatory compliance in crypto. 
  • The project comes after Tornado Cash was shut down. 
  • Critics claim that the project was a capitulation to regulators. 

The crypto industry is under constant threat from regulators, something that key players are keenly aware of. To ensure compliance while protecting privacy, Ethereum co-founder Vitalik Buterin unveiled a new “Privacy Pools” proposal. But can this proposal avoid the grim fate of protocols such as Tornado Cash? 

Understanding ‘Privacy Pools’ and How They Are Different

On Thursday, September 7, Buterin published a report proposing ‘Privacy Pools’ as a solution to the dilemma between privacy and regulatory compliance for blockchains. To understand it, it is important to first grasp the challenges with existing privacy protocols, such as Tornado Cash or Monero

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Tornado Cash allows users to deposit and withdraw crypto without creating a traceable link between addresses. However, it also facilitates potential illegal transactions. This led to criticism and legal challenges, ultimately leading to an order to shut it down and its developers jailed. Privacy coin Monero faces similar challenges from regulators. 

The issue, as identified by Buterin, was that legitimate users had limited means to dissociate from potentially criminal activity. This is where privacy pools come in. At its core, the ‘Privacy Pools’ proposal aims to differentiate honest users from dishonest ones, ensuring that transactions remain private yet verifiable.

The primary mechanism behind this is the use of zero-knowledge proofs. These proofs allow users to demonstrate that their funds do not originate from known illegal sources without revealing their entire transaction history. 

In essence, it’s a way to prove a statement’s truth without revealing the statement itself. This is key, as it prevents people from using the protocol for illegal actions. 

How ‘Privacy Pools’ Address Regulatory Challenges

One of the primary concerns regulators have with cryptocurrencies is their potential use in money laundering. Traditional privacy protocols, while ensuring transactional privacy, inadvertently provide a haven for bad actors to move illicit funds without detection. 

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For example, if a user wants to prove their funds are legitimate, they can use ‘Privacy Pools’ to show their association with a set of known, lawful sources. Conversely, they can also prove their dissociation from known illegal sources. This effectively prevents criminals from using the protocols to launder stolen crypto.

If law enforcement suspects that a person is using funds that originate from a hack, they can use zero-knowledge proofs from Privacy Pools to find that out. This way, Privacy Pools protect themselves from the charge that they are tools for money laundering. 

Criticisms of Privacy Pools: Capitulating to Regulators? 

The ‘Privacy Pools’ proposal has not been without its detractors. While the proposal promises enhanced privacy and a way to dissociate from illicit funds, it also raises concerns about the potential overreach of regulators and centralized entities.

One of the primary criticisms is that ‘Privacy Pools’ might inadvertently give regulators and centralized entities too much power. For instance, some critics pointed to the move as a preemptive capitulation to regulators. 

Other users stressed that Privacy Pools put too much burden on the users. Creating a system where users must prove their dissociation from illicit funds places the onus on individuals to validate their innocence. 

Critics say all these factors could lead to a scenario where regulators have undue influence over the blockchain. Still, with services like Tornado Cash banned, Privacy Pools could be a compromise that protects user privacy while satisfying regulators. 

On the Flipside

  • Crypto faces regulatory challenges far beyond those of Tornado Cash. While ‘Privacy Pools’ addresses a specific aspect of regulatory scrutiny, broader challenges remain.
  • In the past, Vitalik Buterin defended Tornado Cash and its developers, claiming the protocol has legitimate use cases.

Why This Matters

As digital currencies inch closer to mainstream adoption, ensuring a balance between user privacy and regulatory compliance becomes paramount.

Read more about the Tornado Cash case:
Tornado Cash Founders Face Court over “Assisted Laundering”

Read more about Btrust’s plans in Africa:
Jack Dorsey’s Btrust Aims to Train African Bitcoin Engineers with Latest Acquisition

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
David Marsanic

David Marsanic is a journalist for DailyCoin who covers the intersection of crypto, traditional finance, and government. He focuses on institutionalized crypto entities like major cryptocurrency exchanges and Solana, breaking down complex topics into easy-to-understand writing. David's prior experience as a business journalist at various crypto and traditional news sites has enabled him to maintain a critical approach to news while adhering to high journalistic integrity standards.