Balancing Privacy Rights With Regulatory Demands in Blockchain

If there’s one thing that blockchain technology has proven over the years, it’s that it has a myriad of use cases. From cryptocurrency to NFTs to DeFi to gameFi, there’s virtually no industry that blockchain cannot be applied to, and many of these have embraced it thanks to its numerous benefits.

Besides things like permanent record-keeping and speed efficiency, one of the biggest selling points of blockchain technology is privacy. Because blockchain is decentralized by nature, users’ activities are generally kept very private, with even the network creators having limited access to them. However, while this has proven to be a significant selling point for blockchain, it does pose a bit of an irregular grey area. 

How Blockchain Stays Private

First things first, it is worth looking at how exactly blockchain technology functions and how this lends it towards privacy preservation. A typical centralized computer network has a single or a handful of servers or computers through which transactions are processed. This means that the centralized body has veto power over the activities it processes and considers transactions of its users. Think of the way your bank can always view your transactions at any given time or how your internet service provider can track your activities.

Blockchain is also referred to as distributed ledger technology and sees hundreds, if not thousands or millions, of computers confirming transactions. The fact that blockchain networks rely on so many computers working in tandem means that no single user has complete control over the network. On top of this, blockchain-based transactions are typically represented through things like crypto wallet addresses that are a combination of numbers and letters. Think of the way there are crypto wallets with millions of dollars worth of tokens, but no one, not even the network creators, can identify those people by name.

The ability to conduct transactions under the cloak of privacy has seen cryptocurrency especially leverage within many industries. Things like gambling, cross-border transactions, and so on have seen an uptick in crypto use for this reason. It’s even to the point that you can use an anonymous crypto exchange to simply swap tokens in and out of wallets without having to sign up and complete know-your-customer (KYC) processes.

Many blockchain stakeholders believe that privacy will come to play a part in why blockchain technology remains popular among users. As this popularity grows, blockchain stakeholders and regulators will have to examine the complexities of privacy rights versus protection and oversight.

The Trouble With Blockchain Privacy

On the surface, an increase in blockchain usage should not be an issue. After all, blockchain comes with so many benefits for users, and even world governments are starting to embrace it and its by-products. The problem is that while privacy can be a major benefit for individuals, it poses an issue for government bodies.

Take the privacy tokens. While they allow users to transfer funds without revealing their identity, it does pose the risk of being used for criminal activity. In fact, there have been instances of kidnappers requesting payment in the form of privacy tokens so that they are less likely to be caught. There have also been instances of criminals using token mixers to obscure they are transactions and evade law enforcement. Governments have even placed sanctions on specific crypto mixers for this reason.

As cryptocurrency is being used more within the wider financial space, there have been efforts to make sure that there is as much transparency as possible. Cryptocurrency exchanges in the last few years have been required to up their KYC requirements for customers to stay compliant with certain countries’ laws. This is in a bid to avoid any instances of tax evasion, as well as money laundering or funding illegal activities like terrorism.

Simply put, the more use cases we discover for blockchain technology and the more these use cases are applied on a scale, the more complex the issue of privacy rights will be. Anyone who is familiar with various government processes will tell you that your right to privacy is conditional and, in some cases, entirely non-existent.

Take the issue of North Korea, which has been accused of orchestrating cryptocurrency hacks to raise money for its nuclear weapons program. Cryptocurrency and other blockchain-based assets being leveraged by world powers mean that there will be greater emphasis on transparency and trackability to avoid negative repercussions.

How Can These Be Balanced?

With all these considerations, they are practical steps that both regulatory and blockchain users can take to strike a balance between preserving privacy while also not turning blockchain into the Wild West. 

Zero-knowledge proofs 

As blockchain technologies are being used more within the financial sector, several Innovations have come forward that strike this privacy balance. Zero-knowledge proofs are one of them and are a technology that allows platforms and institutions to confirm information without revealing it, e.g, confirming that a particular user has a credit score above a certain threshold without actually revealing it. These could be leveraged more within blockchain systems to allow users to complete their transactions in privacy while still offering regulatory and various platforms the information they need.

Private Blockchains

Certain use cases lend themselves way less to privacy, and in these cases, we could see an increase in the use of private blockchains. These, as the name would suggest, are smaller blockchains that are typically created with a specific project or use case in mind. These offer much less privacy than the larger commercial blockchain, and if the technologies are being used in certain things such as government, private blockchains might be the way to go.

AML and KYC Laws

Regulators might find themselves enforcing stricter AML and KYC laws for various blockchain service providers. The extent to which customer information will need to be collected and stored will be ironed out over the years, but overall, these laws can be enforced in a way that does not rob users of the blockchain experience, but also puts guidelines in place for stock.

Projects, in turn, can ensure that they adhere to these laws to avoid being sanctioned or shut down by the government. At the same time, more education of both consumers and regulators, as well as lobbying and could see more privacy-preserving laws put in place. It’s apparent that many regulators are creating laws regarding cryptocurrency from a place of ignorance, and this can be combated over time

Customers Using Privacy-Preserving Options 

Customers who are still particular about enjoying blockchain-based privacy might also benefit from using privacy-preserving services. As we said earlier, using anonymous exchanges, gambling platforms, insurance brokers, and so on means that they can still have their needs met while maintaining their privacy. As blockchain use only expands, these platforms might become much more niche and perhaps less accessible, but they will still remain an option.

Strategic Business Operations

Privacy laws, like every other law, are different around the world, and it is not unheard of a businesses to set up shop in certain countries to take advantage of laws. Blockchain entrepreneurs might find themselves concentrating in certain countries with less stringent privacy laws to make sure that they continue to serve their customer base while not ending up in legal hot water.

Disclaimer: This is a paid post and should not be treated as news/advice.