Regulators are cracking down on financial privacy, but ZK-proofs can help.

Regulators are pushing privacy-preserving protocols like cryptocurrency microcryptors, but zero-knowledge proofs (ZK-proofs) could provide a solution for both developers and regulators.

Legally providing privacy protection features is the biggest concern of today's privacy-focused blockchain protocols, which can be used by anyone with internet access.

However, the evolution of ZK-proofs, along with other examples of privacy protection, like decentralized identity verification systems, will help ensure that protocols protect privacy and do not exploit any terrorist organizations or money launderers, said Matthew Niemerg, co-author. Founder and President of Aleph Zero.

In an interview with Cointelegraph, Niemerg explained:

Regulatory compliance for privacy-focused protocols became even more critical on May 14 after Dutch authorities sentenced Tornado Cash developer Alexey Percev to five years and four months in prison for swindling $1.2 billion worth of illegal digital assets on the platform.

The fine comes despite the fact that Tornado Cash is a non-custodial crypto hybrid protocol – meaning that funds passing through the protocol are never captured or monitored.

In a promising development for open source code developers, ZK-Proofs could be used to prove that none of the cryptocurrencies on the platform were previously linked to any illegal activities, said Aleph Zero's Niemerg:

“From last 20 transactions period or from XYZ block, [ZK-proofs] He can create various types of assurances to ensure that these funds do not touch anyone linked to the sanctions list.

ZK-Proofs can be used to create a decentralized Web3 identity for each user, funds and wallets to ensure that they are not associated with criminal activity while maintaining the user's anonymity.

However, Nimmerg noted that ZK-proofs and decentralized identity systems need further development before they can facilitate such complex tasks.

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Financial privacy is not a crime.

For Aleph Zero, helping developers build compliant privacy tools is a priority, according to Nimerg:

“There are many real-world use cases when it comes to private transactions… Just because you want privacy doesn't mean you're doing it wrong.”

Financial privacy has become a growing concern since 2022, when the US government blacklisted Tornado Cash for money laundering.

The concerns escalated on April 24 after the founders of Zamora Wallet were arrested. The cryptocurrency wallet's CEO Keon Rodriguez and chief technology officer William Hill each face one count of money laundering and one count of conspiracy to conduct an unauthorized money transfer business.

CryptoQuant founder and CEO Ki Young Joo said the arrest was classified as an attack on crypto privacy pioneers:

“Privacy is a core value of Bitcoin. It is not a crime to mix oneself up. Even crypto exchanges use encryption to protect user privacy. It's like punishing the one who uses the knife, not the one who invented it.

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