Researchers at German cryptocurrency payments company etonec and other organizations have proposed using zero-knowledge proofs to ensure regulatory compliance and privacy in stablecoins. They have created a design that allows fiat-based stablecoins to be used like cash, within limits.
The investigators’ design allows for a number of limits, including those on transactions, balances and turnover, and enables compliance with anti-money laundering and anti-terrorist financing regulations through the use of zero-knowledge evidence , in particular zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge). Below preset limits, transactions would be invisible to third parties.
According to the researchers’ report
“In essence, our goal is to create a stablecoin that offers privacy guarantees similar to privacy coin Zcash or the Tornado Cash mixer, but without the corresponding regulatory challenges regarding money laundering and terrorist financing.”
In this account-based model, users would create their respective ZKPs (presumably zero-knowledge protocols, though the abbreviation is undefined), then use unique digital identities to send proof of funds to the blockchain, where validators would verify the ZKPs and add the transaction to the ledger. The identity could be established by the government or by a third party.
The balance between digital privacy and AML/CFT compliance is a topic of current debate in the United States and the European Union. The researchers say their system could be linked to the European electronic identity system eIDAS when it is finalized.
how can #privacy for digital payments be preserved, while ensuring stability and regulatory compliance? In this feasibility study co-authored by @etonec_gmbh, @MinaFoundation, @privatbank1796and @SnT_uni_lu we show how it can be done.https://t.co/JYkuvURXWi pic.twitter.com/AH9n1DTSre
— Dr. Jonas Gross (@Jonas__Gross) December 15, 2022
In addition to etonec, the Mina Foundation, based in San Francisco and operator of the Mina Protocol, has participated in the research; the German bank Hauck Aufhäuser Lampe; and the Interdisciplinary Center for Security, Reliability and Trust at the University of Luxembourg. Mina stands out for its claim to be “the lightest blockchain in the world”, by consuming external information without the need for an oracle.
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