Users vs. governments: The ‘infinity war’ for blockchain privacy may be over


The unique power of blockchain and cryptocurrency can also be considered as their weakness. Crypto users get unsurpassed privacy for financial transactions through a decentralized transaction system. However, governments demand transparency in financial transactions for legal reasons. This creates a paradox. People are less likely to use financial instruments if they thereby expose their money to the world. Conversely, there are a number of rules that require financial institutions to combat terrorism and money laundering – serious concerns for many governments.

The crux of the problem is that most public blockchains require agreement between all participants to validate transactions. How can both sides – individual users and governments – achieve their conflicting goals when they are diametrically opposed?

A potential solution to this problem involves balancing users’ privacy concerns with the centralized oversight needed by governments to ensure compliance with rules such as Anti-Money Laundering, Know Your Customer and the fight against terrorist financing. Implementing measures for confidential transactions along with those for government surveillance finds a delicate balance where cryptocurrency assets remain discreet, yet subject to the laws governing financing worldwide.

Related: Comparison of money laundering with cryptocurrencies and fiat

Fight against terrorism and money laundering

The government’s need to monitor counter-terrorism cryptocurrency transactions and AML purposes is crucial to public security, especially as these two areas are interlinked. Money laundering can be used to finance terrorist activities that – like everything else – require funding, even if it does not involve money laundering. Mapping the cash flow between parties on popular cryptocurrencies such as Bitcoin (BTC), Ether (ETH) and others can provide invaluable information to prevent these crimes. Regulators need at least insight into which parties are paying whom and why.

However, cryptocurrency does a lot to make it easy to hide these and other transactions. Bitcoin can be tracked with modern tools, but some transactions are completely traceable with other cryptocurrencies. These legitimate concerns partly explain the formation of organizations such as the Financial Action Task Force, which exists to counter money laundering and terrorist financing, and whose efforts will greatly benefit from better visibility of cryptocurrency transactions.

Related: A minister looks at what regulators expect from the industry

Privacy matters

Public privacy problems whether the use of cryptocurrencies is in many ways contrary to the visibility required by the government for AML and terrorism efforts. People simply want to keep their business as discreet with cryptocurrencies as with conventional currency transactions. However, the transaction validation features of public blockchains could potentially delay this information and attack users’ financial privacy.

Related: Blockchain can provide the right to privacy that everyone deserves

The first element of a solution that provides consumer privacy along with state oversight is to address this issue. There are confidential transaction features – some of which are used by Monero cryptocurrencies (XMR) or Zcash (ZEC) – obscuring the amount of a transaction and participants while still validating a blockchain. These cryptocurrencies provide measures to prevent people from knowing the origin, destination, and size of a particular transaction. These approaches address many of the concerns of privacy for cryptocurrency holders.

Related: Dash claims ‘inaccurate categorization’ as ShapeShift removes privacy coins

Cryptocurrency monitoring

By pairing these confidentiality methods with the following ideas for cryptocurrency monitoring, governments can monitor counter-terrorism activity and AML purposes. Say, for example, that there is a cryptocurrency supported by an organization that consists of a limited number of banks. The first thing users should do is board with these institutions – just as they would with others – providing an initial layer of insight into cryptocurrency behavior while supporting mandates like KYC. Then, after users have issued transactions to others who are registered with this organization, they would be required to pass on the details to one of the bank members for proof. This obligation can be enforced on the transactor using cryptography so that the validators can ensure that the disclosure is made correctly.

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Such an approach would allow the government to collectively ask each bank for the information in a transaction so that it can monitor the cash flow. The government would therefore have central supervision with permission for the input of the individual financial institutions. With this paradigm, banks validate transactions, the government collects all data for central analysis and monitoring, and consumer privacy is maintained among financial organizations and cryptocurrency users. There are additional cryptographic approaches when connected with blockchain cryptographic support can support this model for both privacy and compliance.

Related: You should be interested in decentralized identity in the wake of COVID-19

The use of cryptocurrency is evolving rapidly. It is unacceptable for financial institutions to tell national or international regulators that they do not know whether transactions are legitimate. It is just as unacceptable to expose the financial skill of the legitimate user to anyone on a blockchain.

The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Debasish Ray Chawdhuri is a senior civil engineer at Talentica. Debasish is an IIT Delhi alumnus and a researcher who has worked closely with the founders of high-growth start-ups and enabled the adoption of new technologies such as Blockchain. He has published several research papers on privacy, cryptocurrency, smart contracts and cryptography on prominent platforms such as IEEE and Springer. He also wrote a famous book on data structure and algorithms.

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