The SEC should use roundtables to discuss movement policies with already technically possible, develop clear guidance on privacy preservation, and recognize proofs as valid form of regulatory compliance.
Washington is finally paying attention to the full scope of the crypto issue. Earlier this week, it’s Bitcoin reserve and soon becomes privacy.
On October 17th, the Securities and Exchange Commission (SEC) will hold a public roundtable on financial surveillance and privacy. This is a rare opportunity to change how privacy is treated in economic regulation.
When people use blockchain today, they are exposed more dramatically than they understand. Linking social identity to your wallet makes economic life a public feed.
This level of data exposure cannot be overlooked in future public roundtables. Zero-Knowledge Proofs (ZKPS) patches this leak and offers another default option to meet compliance requirements without releasing personal data.
The SEC’s October roundtable suggests that agents are open to discussing smarter proofs. The SEC is reviewing its filing that allows tokenized securities to be traded in national exchanges. The evidence that market methods can be modernised without abandoning surveillance for actual risks.
ZKP was born to maintain privacy, but most real-world deployments, including those I focused on (such as launching ZCASH), track scalability. However, privacy possibilities are whimsical and the ability to prove facts without revealing data is the best way to restore confidentiality. This October opportunity gives everyone the opportunity to stop treating privacy as a secret synonym and ultimately begins designing regulated privacy.
Privacy is not a secret
The term radical transparency, which is found throughout Web3, reads as great on white paper, but transforms everyday life into a real open book. Wallets tied to a person’s real-life ID become overexposed, exposing economic patterns of donations, purchases and behavior forever.
The problem is simple. People don’t want to expose their financial lives. Privacy is not about hiding malicious behavior. It is primarily about protecting personal data that is shared with other parts of the world.
Compliance is an essential prerequisite for a blend of blockchain, traditional finance (Tradfi), and security, but unnecessary data is shared. ZKPS overcomes this issue, reframes the surveillance debate and assures regulators that raw user data is not needed to manage risk.
We will publish evidence that the venue has sufficient capital, concentration restrictions are in place, and obligations to users and regulatory authorities are met. Custodians and brokers can follow the lawsuit and prove inventory and separation through ZKP, ensuring that customer data remains private.
By incorporating this ZKP, we can improve regulatory processes and provide the real-time guarantees needed for citizens to retain their rights and proceed safely.
You need to keep your privacy easy
ZKP has been around for years and has helped to keep the live environment safer and more private. The problem is that shielded transactions are clunky and there are very few wallets to support them. Hardware wallets often do not. What’s worse, even on-ramps and off-ramps can be considered high-risk.
For Decentralized Finance (DEFI), smart contracts automatically leak global states such as automatic market makers (AMMs), such as UniSwap, making privacy even faster.
Today’s design is not built to hide it. This means sacrificing user data security with each transaction. The challenge here is that users cannot expect privacy to choose their privacy if they are more complex, slower and incompatible with other ecosystems.
It is still possible to move forward through a semi-private architecture that provides powerful privacy to users without losing transparency or compliance.
Semi-privacy involves generating ZKPs using Layer-3 (L3) or application-specific domains, thereby protecting data from Public Layer 2 (L2). Operators can see the user’s activity, but they must provide encrypted proofs such as accuracy, solvency and other such as to the public chain (or regulatory authority).
This allows for regulated confidentiality and allows users to maintain privacy from the public eye, not from the specified verification agent. If an operator like censorship or Frontrun malfunctions, the user has an encryption exit in another domain. This effectively encourages good behavior.
Regulated privacy lock
The SEC Roundtable must be more than a discussion of data and surveillance. Rather than oppose them, it’s the moment to discuss the outdated trade-offs that still exist in society where privacy should be built as default in a way that operates with regulations.
Regulated privacy (and more) protecting users while providing regulators with the visibility they actually need can create confidence in consumers and providers. ZKPS should do just that and instill assurances that the rules are followed without compromising user privacy.
The SEC should use roundtables to discuss movement policies with already technically possible, develop clear guidance on privacy preservation, and recognize proofs as valid form of regulatory compliance.
ZKP has already had a huge positive impact on blockchain structure and everyday user lives, so why not move into the realm of regulatory vision and surveillance? Regulatory privacy becomes a reality with proper proof that is deemed valid by regulators.
Should regulators treat ZKP as essential to creating this future? This round table is the moment they say yes.
Eli Ben-Sasson is Starkware CEO and co-founder.