How Accumulate Enables Better Compliance For Blockchain Privacy Tools

Written by TJ

On September 1, 2022

In the wake of the recent bans of crypto mixing services, privacy has once again become a focal point of the web3 community. While the long-term implications of these events remain unknown, what’s clear to many in the crypto space is that there need to be better solutions to enforce the self-regulation of privacy tools. 

As a reaction to the ban,  stablecoin providers began blacklisting addresses that had previously engaged with the mixing services, creating a serious dilemma for a number of users.  

There is a type of cross-contamination between real bad actors (e.g state-sponsored hackers) and well-meaning individuals who wish to have privacy for their transactions in order to donate to political causes such as the Ukraine crisis, or simply to make payments to people without revealing how much crypto they own in their sending wallet.

What’s clear is that distinctions need to be made between these different groups of users so as not to conflate the privacy-conscious users with the malicious-minded actors. 

A Credibly Neutral Audit Trail for Private Transactions

Accumulate can solve this problem by establishing an identity, audit, and communication layer for addresses that wish to use privacy tools while signaling to regulators that they are being compliant with KYC and AML regulations.  

We can think about the Accumulate Network as a neutral space where well-meaning users of privacy tools could register an ADI linked to some form of off-chain personal identification (a bank account, state ID, etc). The individuals or entities could then connect their ADI to addresses that engage in private transactions on other chains, providing an audit trail that is accessible when needed for tax purposes or other reasons. 

The Accumulate layer would link all ETH addresses associated with private transactions, creating an audit trail for users who wish to conduct private transactions in a regulatory-compliant manner.

Separating The ‘Good’ and ‘Bad’ Users of Privacy Tools

What this solution could provide is a way for users of privacy tools to demonstrate their intent by creating an audit trail for their private transactions on a 3rd party network. 

The user’s ADI could be hosted on a private permissioned version of an Accumulate chain, or public permissionless one where it would be formatted in such a way as to preserve anonymity.  

In either case, the ADI would not be known to those who transact on the network that offers the privacy tools. For example, Ethereum users would not be able to link 2 addresses together if they transferred funds with each other using a mixing service. However, the owner of the ADI would link those addresses themselves (or have them linked by an audit service) and then store the audit trail on Accumulate.  

While banned mixing services did offer a compliance feature that would enable users to download a report of their transactions on the mixing service, it is only natural that regulators would be skeptical of the accuracy of this feature knowing that it came from the privacy tool itself instead of a neutral 3rd party. 

Establishing a 3rd party network that provides users of these tools with the ability to signal their intent to use them for legal purposes allows regulators and exchanges to more easily distinguish between different types of users and prevents much of the cross-contamination of ‘good’ and ‘bad’ addresses that we’ve seen in recent weeks. 

Over time, addresses that engage in private transactions but have not linked themselves to an ADI could be placed in a higher category of risk compared to those that are linked to ADIs which are themselves linked to some form of off-chain and official form of identification. 

This data could not only be useful for regulators and exchanges but also for everyday users who don’t want to transact with addresses that engage in private transactions without an ADI. 

Another benefit of adopting this solution is that it removes the need to classify specific tokens as high or low risk, which is ultimately a futile effort because of the fungible and divisible nature of cryptocurrencies. 

Conclusion

Coming to a place of understanding between citizens and governments about what qualifies as an acceptable use of privacy tools is not something anyone can expect to solve overnight. However, with the help of Accumulate’s identity and communication layer, there can be a compromise that allows users to create a transparent audit trail of their private transactions on a credibly neutral platform, giving regulators an easier way to scope out high-risk addresses from those that simply want to protect their privacy for social,  security or commercial reasons. 

Ultimately, by providing more compliant ways for users to adopt privacy technologies, Accumulate can enable these technologies to unlock their full potential. 

For mixing service tools, coins like Monero, or Zero-Knowledge proof based Dapps, this means empowering individuals and entities to leverage public blockchains without having all of their activities displayed on-chain, and more importantly, without the risk of being mistakenly associated with criminal activities.

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