Vitalik Buterin, Co-Founder of Ethereum, has co-authored a paper outlining a greater need for protection when it comes to mitigating crime through blockchain. 

With public and wallet addresses readily available on various blockchain networks, Buterin has called for ‘privacy pools’ to distinguish genuine customers and criminals, whilst also acknowledging that concerns over blockchain security have ‘crescendoed’. 

This partially stems from recent blockchain-related crimes such as the Tornado Cash scandal in which more than $1bn was money laundered to fund the Lazarus Group – a sanctioned North Korean entity recognised as a cyber security threat.

Whilst two members of Tornado Cash were ultimately charged by the US Securities and Exchange Commission (SEC), the incident highlighted more stringent security protocols for crypto and blockchain activity. 

Buterin and the co-authors recognised the Tornado Cash incident and highlighted the critical cause of criminals being able to differentiate themselves from honest blockchain users. 

The paper states: “The critical issue with Tornado Cash was essentially that legitimate users had limited options to dissociate from the criminal activity the protocol attracted. 

“Tornado Cash provides a compliance feature that allows a user to create a proof of which deposit a given withdrawal came from. While this mechanism does allow people to prove their innocence, it comes at the cost of having to trust a centralised intermediary and creates information asymmetries.”

The “Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium” paper presented the idea for privacy pools to “theoretically solve part of this issue” which look to use zero-knowledge technology to identify honest and criminal users. 

This technology would then pool together these two categories of users separately, with the honest users being able to prove their legitimate transactions. 

The paper goes into greater detail about privacy protocols, outlining: “Privacy Pools gives additional options by extending the users’ action set. They can still provide more detailed proofs to specific counterparties, if needed. 

“However, there will be cases when a membership or exclusion proof might be sufficient. Moreover, the option to publish these proofs publicly does have many advantages over bilateral disclosure.”

Buterin aims to extend his and Ethereum’s research into blockchain privacy protocols that can contribute to a more secure environment where “financial privacy and regulation can co-exist”.