Public Blockchains: The Privacy-Transparency Conundrum

Abstract

Public blockchains promise privacy and transparency at the same time. At first sight this seems contradictory. First, one needs to understand technically what kind of privacy and what kind of transparency blockchains ensure. But besides the technicalities, this essential relationship between privacy and transparency on blockchains has legal consequences. Indeed, regulators criticize public blockchains. For data privacy regulators they are too transparent whereas for crime enforcement their anonymous or pseudonymous nature makes them a challenge.

From a legal perspective it is particularly data protection and privacy laws as well as the legal areas dealing with crime and fraud that are involved. Data protection and privacy laws are concerned with the permanent and very transparent nature of public blockchains whereas laws combatting money laundering and terrorist financing as well as tax laws are more interested in the money-like feature of certain tokens or crypto currencies. At first sight, one would tend to think that the link between personal data protection and AML/CFT or even tax issues is very weak. But that would be a mistake. Indeed, these subjects are, to some extent, interdependent.

This article tries to underline the link between these two topics and advocates that regulators should work together in order to determine the right amount of transparency and privacy needed on a blockchain. The more the curser is set towards privacy, the bigger the challenges for law enforcement agencies. But too much transparency also hampers business ventures. No one would like to have his or her life or business relations layed out on a blockchain.

The article first describes the technical solutions blockchain offers for privacy (I) before confronting them to the GDPR and outlining the incompatibilities between those rules and the technology (II). It then presents the initiatives of regulators in favor of extending AML/CFT rules to transactions on blockchains (III) in order to assess by way of conclusion whether such requirements actually
allow to solve the conundrum between privacy and transparency (IV).

Keywords: blockchain, AML, money laundering, terrorist financing, privacy, GDPR, data protection, transparency, crypto-currencies, tokens

JEL Classification: K00, K10, K20