Privacy Pools, a project introduced this year by Ameen Soleimani, a prominent developer and founder, has gained recognition in the cryptosphere. Soleimani, who previously contributed to Tornado Cash, aimed to enhance the widely-used open-source solution for anonymizing Ethereum transactions to make it more regulator-friendly.
The initial teaser, presented in March, was based on an idea originally proposed by Ethereum co-founder Vitalik Buterin in 2022. However, it failed to capture the attention of the crypto community until Buterin published an academic paper on the subject, which sparked wider interest on social media.
The combination of “blockchain privacy” and “regulatory compliance” has caused some cypherpunks to be upset, while leaving others in the community curious about whether regulators would be interested in legitimizing the use of non-custodial crypto-asset mixers. These mixers play a crucial role in the on-chain economy but are often misunderstood.
In a future where zero-knowledge (ZK) proofs become mainstream and decentralized finance (DeFi) incorporates automated compliance at the smart contract level, this paper has initiated a conversation on the topic. However, the path from the current situation to the desired outcome is still uncertain.
The article explores whether Privacy Pools can currently meet compliance requirements and satisfy the core values of the community. It also addresses one of the paper’s significant shortcomings: the narrative surrounding it.
One challenge is that users can only prove their innocence by demonstrating that their original deposit is either from legitimate sources or not from known unlawful sources. These associations sets, which are yet to be defined by the ecosystem, are not limited to addresses on the Office of Foreign Assets Control’s Specially Designated Nationals (OFAC SDN) list or staying away from malicious actors.
While it is easy to add addresses associated with hacked protocols or indicted criminals to an association set, bad actors can remain undetected for an extended period, allowing coins linked to illicit activities to reenter circulation. This is unlike the traditional financial system, where physical cash accounts for a small portion of payments, and illicit funds held in banks can be easily frozen. Regulators have become accustomed to the extensive KYC processes in the traditional system.
In addition to meeting regulatory requirements, it is crucial to consider whether the crypto community will embrace the solution. This is not only about hardcore cypherpunks but also about users in oppressive regimes and political activists in unhealthy democracies.
For these privacy pools to effectively improve transaction privacy, users need to trust the entire ecosystem surrounding them. Even if association sets can be automated, it is essential to consider the role of oracles and the entities controlling these lists. This can potentially lead to a concentration of power in deciding who is a bad actor without a clear mandate.
While the proposal has good intentions and a flexible and powerful design, many developers remain skeptical about the benefits of regulation in the industry. Creating a separate regulated environment for users to opt into may not solve these concerns. The crypto policy conversation needs more participation to bridge the gap between privacy and increasing attacks.
To bring about change, individuals should support national crypto advocacy groups and understand their objectives and achievements. Engaging in lobbying efforts is crucial for creating a better future.
In conclusion, Privacy Pools has garnered attention in the cryptosphere, but there are still challenges to overcome regarding compliance and community acceptance. The article emphasizes the need for active participation in shaping the crypto policy conversation to ensure better privacy protections and education.