Source: a16zcrypto
Compiled by: AIMan @ Jinse Finance
From telegraphs and telephones to the internet, new technologies have always sparked fears of privacy's impending demise. Blockchain is no exception, and the privacy on blockchain is often misunderstood as creating dangerous transparency or a haven for crime.
But the real challenge is not choosing between privacy and security, but building tools that can support both—whether on a technical or legal level. From zero-knowledge proof systems to advanced encryption technologies, privacy-protecting solutions are continually expanding. Blockchain privacy extends far beyond finance; it also opens doors to applications in identity verification, gaming, artificial intelligence, and more that benefit users.
With the recent signing into law of U.S. stablecoin legislation, the demand for blockchain privacy is more urgent than ever. Stablecoins represent an opportunity for a billion people to participate in cryptocurrency. However, to enable users to confidently use cryptocurrency for various payments, from coffee to medical bills, they need to ensure that their activities on-chain remain private. Now is not the time for myth-making, but for building.
The debate about privacy is not new, and the answer is equally so: innovation, rather than myth and misunderstanding, will shape the future of privacy.
Misunderstanding 1: The internet is the root cause of modern "privacy issues."
Truth: Nearly a century before the internet, the communication revolution of the late 19th century propelled the development of privacy rights in the United States. Technologies developed by entrepreneurs brought unprecedented heights to the transmission of information (news, text, images, and other media), including the first commercial telegraph, telephone, commercial typewriter, microphone, and more. Historian and professor Sarah E. Igo observed that in America at the time, "privacy conflicts developed alongside new modes of communication," raising new privacy questions: Can the news media use someone else's name, image, or photograph for commercial purposes? Can law enforcement wiretap phone lines to eavesdrop on conversations, or use photography and fingerprint recognition to establish permanent records or registries to identify criminals?
Shortly after these technologies were introduced, legal scholars began addressing the privacy challenges they posed. In 1890, future Supreme Court Justice Louis D. Brandeis and lawyer Samuel D. Warren published an article titled "The Right to Privacy" in the Harvard Law Review. Since then, privacy law has steadily evolved throughout the 20th century in the realms of legislation, tort, and constitutional law. More than a century after Brandeis and Warren published their legal commentary article, in 1993, the first widely used commercial internet browser, Mosaic, was released, leading to an increase in privacy issues related to the internet.
Misunderstanding 2: The internet can function normally without privacy.
Truth: The early internet lacked privacy protections, which severely hindered its broader adoption. Generally, people had higher levels of privacy protection before the internet emerged. As Simon Singh noted in "The Code Book," early cryptographic pioneer Whitfield Diffie pointed out that when the Bill of Rights was approved, "any two people could walk down the street for a few meters and see if anyone was hiding in the bushes and have a private conversation—which is certainly unmatched in today's world." Similarly, people could conduct financial transactions based on goods or cash, enjoying privacy and anonymity that most digital exchanges today do not provide.
Advances in cryptographic research have alleviated concerns about privacy and spawned new technologies capable of facilitating the exchange of confidential digital information while ensuring reliable data protection. Cryptographers like Diffie predicted that many users would demand basic privacy protections for their digital activities, leading them to seek new solutions that could provide such protections—namely, asymmetric public key cryptography. Diffie and others developed new cryptographic tools that have become foundational to e-commerce and data protection. These tools have also paved the way for other confidential digital information exchanges that are now applicable to blockchain.
The development of the Hypertext Transfer Protocol Secure (HTTPS) is just one example of privacy tools that have propelled the booming growth of the internet. In the early days of internet development, users (i.e., clients) would communicate with web servers using the Hypertext Transfer Protocol (HTTP). This web protocol allowed data to be transmitted to the web server, but it had a significant drawback: it transmitted data without encryption. Therefore, malicious actors could read any sensitive information submitted by users to websites. A few years later, Netscape developed HTTPS for its browser, adding a layer of encryption that could protect sensitive information. As a result, users could send credit card information over the internet and engage in private communication more broadly.
With encryption tools like HTTPS, internet users are more willing to provide personal identification information—such as name, birth date, address, and social security number—through online portals. This has made digital payments the most common method of payment in the United States today. Businesses also bear the risks associated with receiving and protecting such information.
These changes in behavior and processes have spawned numerous new applications, from instant messaging to online banking to e-commerce. Internet activities have become an important part of today's economy, bringing unprecedented communication, entertainment, social networking, and other experiences.
Misunderstanding 3: Public chain transactions are anonymous.
Truth: Public chain transactions are transparently recorded in an openly shared digital ledger, so transactions are pseudonymous rather than anonymous—this is an important distinction. Pseudonymity as a practice with centuries of history has played a significant role even in early America: Benjamin Franklin published his early works under the pseudonym "Silence Dogood" in the New England Courant, while Alexander Hamilton, John Jay, and James Madison used "Publius" to signify their contributions to The Federalist Papers (Hamilton used multiple pseudonyms in his writings).
Blockchain users conduct transactions using wallet addresses associated with unique alphanumeric characters (i.e., keys) rather than their real names or identities. Distinguishing between pseudonymity and anonymity is crucial to understanding the transparency of blockchain: while the alphanumeric characters of wallet addresses cannot be immediately linked to specific users' identity information, the degree of privacy protection for key holders is far lower than many realize, let alone anonymity. The function of encrypted addresses is similar to that of usernames, email addresses, phone numbers, or bank account numbers. Once a user interacts with another person or entity, the counterparty can associate the pseudonymous wallet address with a specific user, thereby exposing the user's entire on-chain transaction history and potentially revealing their personal identity. For instance, if a store accepts cryptocurrency payments from customers, the cashier can see the shopping history of those customers in other stores as well as their cryptocurrency holdings (at least for the blockchain network wallet used for that transaction, as experienced cryptocurrency users often have multiple wallets and tools). This is akin to disclosing your credit card usage history.
The original Bitcoin white paper addressed this risk, noting that "if the identity of the key owner is revealed, the association may expose other transactions of the same owner." Ethereum co-founder Vitalik Buterin has also written about the challenges of "making a large part of your life’s information public for anyone to see and analyze," proposing solutions such as "privacy pools"—zero-knowledge proofs allow users to prove the legitimacy of funds and their sources without revealing the full transaction history. As a result, some companies are also researching solutions in this area, not only to protect privacy but also to develop new applications that combine privacy with other unique attributes of blockchain.
Misunderstanding 4: Blockchain privacy leads to rampant crime.
Truth: Data from the U.S. government and blockchain analysis companies indicate that the proportion of cryptocurrency used for illicit financing remains lower than that of fiat currency and other traditional sources, with illegal activities accounting for only a small fraction of all activities on the blockchain. This data has remained consistent over the years. In fact, as blockchain technology has evolved, the incidence of on-chain illegal activities has decreased.
It is well-known that in the early days of the Bitcoin network, illegal activities accounted for a large portion of its total activity. As noted by David Carlisle citing researcher Sarah Meiklejohn, "the primary Bitcoin addresses used by Silk Road once accounted for 5% of the total Bitcoin at that time, and the site accounted for one-third of Bitcoin transactions in 2012."
But the encrypted ecosystem has since successfully integrated effective mechanisms to curb illegal financing, and the total volume of legitimate activities has also increased. TRMLabs' recent report estimates that in 2024 and 2023, the volume of illegal transactions accounted for less than 1% of the total volume of cryptocurrency transactions (based on the dollar value of funds stolen in cryptocurrency hacks and the dollar value transferred to blockchain addresses associated with illegal categories). Chainalysis and other blockchain analysis companies have also released similar estimates (including data from previous years).
Similarly, government reports, especially those from the Biden administration's Treasury Department, reveal that the risks of illegal financing with cryptocurrency are lower compared to off-chain activities. In fact, recent Treasury discussions on cryptocurrency—including its (2024 National Risk Assessment), (Decentralized Finance Illicit Financing Risk Assessment), and (Non-Fungible Token Illicit Financing Risk Assessment)—all acknowledge that, by transaction volume and dollar value, most money laundering, terrorism financing, and proliferation financing are conducted in fiat currency or through more traditional means.
Moreover, many transparency features of blockchain (such as those discussed in Myth 3) make it easier for law enforcement to catch criminals. Because the flow of illicit funds is clearly visible on public chain networks, law enforcement can trace the flow of funds to cash-out points (i.e., points for withdrawing cryptocurrency) and blockchain wallet addresses associated with wrongdoers. Blockchain tracking technology has played a crucial role in combating illegal markets, including Silk Road, Alpha Bay, and BTC-e.
For these reasons, many criminals are aware of the potential risks of using blockchain to transfer illicit funds, and thus stick to more traditional methods. While enhancing blockchain privacy may make it more challenging for law enforcement to regulate on-chain criminal activities in some cases, new cryptographic technologies are being developed that protect privacy while meeting the needs of law enforcement.
Myth 5: You can choose between combating illegal financing and protecting user privacy, but you cannot have both.
Truth: Modern cryptographic technologies can coordinate users' privacy needs with the information and national security needs of regulators and law enforcement. These technologies include zero-knowledge proofs, homomorphic encryption, multi-party computation, and differential privacy. Zero-knowledge proof systems are perhaps best positioned to help achieve this balance. These methods can be applied in various ways to curb crime and enforce economic sanctions while preventing surveillance of American citizens or the use of the blockchain ecosystem for theft or money laundering.
Zero-knowledge proof is a cryptographic process that allows one party (the prover) to convince another party (the verifier) that a statement is true without revealing any information other than the fact that the statement is true. For example, to prove whether someone is a U.S. citizen. Using a zero-knowledge proof, a person can prove the truth of that statement without disclosing their driver's license, passport, birth certificate, or other information. Zero-knowledge proofs allow the confirmation of the truth of that statement without exposing specific or additional information that might compromise privacy (whether it be an address, birth date, or indirect password hint).
Given these characteristics, zero-knowledge proof solutions are among the best tools to help detect and prevent illegal activities while protecting user privacy. Current research indicates that privacy-enhancing products and services can reduce risks in various ways, including:
Deposit screening to prevent assets from being deposited from sanctioned persons or wallets;
Withdrawal screening to prevent withdrawals from sanctioned addresses or addresses associated with illegal activities;
Voluntary selective de-anonymization, which provides an option for those who believe they have been wrongly placed on a sanctions list to de-anonymize their transaction details and provide them to selected or designated parties;
Involuntary selective de-anonymization, involving private key sharing arrangements between gatekeeper entities (such as non-profit organizations or other trusted organizations) and the government, where the gatekeeper entity assesses government requests to use private keys to de-anonymize wallet addresses.
With the concept of "privacy pools," Vitalik and others have also advocated using zero-knowledge proofs so that users can prove their funds do not come from known illegal sources—without disclosing their entire transaction history. If users can provide such proof when exchanging cryptocurrency for fiat, then cash-out points (i.e., exchanges or other centralized intermediaries) will have reasonable assurance that the cryptocurrency does not come from criminal proceeds, while users can also protect the privacy of their on-chain transactions.
Despite critics' longstanding concerns about the scalability of cryptographic privacy technologies like zero-knowledge proofs, recent advances have made them more suitable for large-scale implementation. By reducing computational overhead, scalable solutions are increasing the efficiency of zero-knowledge proofs. Cryptographers, engineers, and entrepreneurs are continuously improving the scalability and usability of zero-knowledge proofs, making them effective tools for meeting law enforcement needs while protecting individual privacy.
Misunderstanding 6: Blockchain privacy only applies to financial transactions.
Truth: Privacy-preserving blockchains can unlock a range of financial and non-financial use cases. These features highlight how privacy-preserving blockchain technology fundamentally expands the scope of secure and innovative digital interactions across use cases. Examples include:
Digital Identity: Privacy-enhanced transactions improve digital identity verification, enabling individuals to selectively (and verifiably) disclose attributes such as age or citizenship without exposing unnecessary personal data. Similarly, digital identity can help patients maintain the confidentiality of sensitive information while transmitting relevant test results and other information precisely to doctors.
Gaming: Cryptographic technologies allow developers to hide parts of the digital world (e.g., special items or hidden levels) until players unlock them themselves, creating a more engaging gaming experience. Without privacy tools, blockchain-based virtual worlds would be transparent to users, weakening their sense of immersion; players who are well-versed in the digital world would lack the incentive to explore.
Artificial Intelligence: Privacy-preserving blockchain tools also open new possibilities for AI, allowing for encrypted data sharing and model validation methods without disclosing sensitive information.
Finance: In the financial sector, cryptographic technologies enable decentralized finance applications to provide broader services while ensuring privacy and security. Innovative designs for decentralized exchanges can leverage cryptographic technologies to enhance market efficiency and fairness.
Voting: In DAOs, there is a strong desire for private on-chain voting to avoid potential consequences of voting for unpopular measures or groupthink that may arise from mimicking the voting behavior of specific individuals.
These are just some obvious applications; just like with the internet, once privacy-enhancing features are added, we expect to see many novel applications.
Conclusion
The debate about privacy—who controls privacy, how to protect privacy, and when privacy is stripped away—has existed for at least a century before the digital age arrived. Every new technology in its time has sparked similar panics: telegraphs and telephones, cameras and typewriters, all evoking debates that impacted generations.
Believing that blockchain will only jeopardize privacy, or that blockchain is particularly prone to being used as a weapon for wrongdoing, is a misunderstanding of history and technology. Just as encryption and cryptographic protocols have enabled secure online communication and commerce, emerging privacy-protecting technologies like zero-knowledge proofs and advanced encryption can offer practical methods to safeguard privacy while achieving compliance goals and combating illegal financing.
The real question is not whether new innovations will reshape privacy, but whether technical experts and society can respond to challenges by implementing new solutions and practices. Privacy is not lost or compromised; it continually adjusts to meet the broader and more pragmatic needs of society. For this technological revolution, as with previous revolutions, the question is how to implement it.
