Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium

Abstract

In this paper we study Privacy Pools, a novel smart contract-based privacy-enhancing protocol. We discuss the pros and cons of this protocol, and show how it could be employed to create a separating equilibrium between honest and dishonest users. The core idea of the proposal is to allow users to publish a zero-knowledge proof, demonstrating that their funds (do not) originate from known (un-)lawful sources, without publicly revealing their entire transaction graph. This is achieved by proving membership in custom association sets that satisfy certain properties, required by regulation or social consensus. The proposal may be a first step towards a future where people could prove regulatory compliance without having to reveal their entire transaction history.

Keywords: Blockchain, Privacy, Regulation, Smart Contracts, Zero-Knowledge Proofs