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Researchers use Zero-Knowledge to Address Privacy, AML Concerns in Stablecoins

Organizations led by the German fintech etonec developed a system that uses zk-SNARK to provide untraceable transactions within regulatory constraints.

Researchers from the German crypto blockchain payments fintech etonec and other organizations have proposed using zero-knowledge proofs in stablecoins to ensure regulatory compliance and privacy. They developed a design that allows fiat-based stablecoins to be used as cash within certain parameters.

The researchers’ design allows for a variety of limits, including limits on transactions, balances, and turnover, and enables AML and CFT compliance through the use of zero-knowledge proofs, specifically zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge). Transactions below the preset limits would be invisible to third parties.

“In essence, our goal is to create a stablecoin that provides similar privacy guarantees as the privacy coin Zcash or the mixer Tornado Cash, but without the corresponding regulatory challenges with respect to money laundering and terrorism financing,” the researchers write in their report.

In this account-based model, users would create their own ZKPs (presumably zero-knowledge protocols, though the abbreviation is not defined), then send proof of funds to the blockchain, where validators would verify the ZKPs and add the transaction to the ledger. The government or a third party could establish identity.

Balancing digital privacy and AML/CFT compliance is a hot topic in the United States and the European Union right now. When Europe’s eIDAS electronic identity system is completed, the researchers believe their system could be linked to it.

Participants in the study included the San Francisco-based Mina Foundation, which operates the Mina Protocol; the German Hauck Aufhäuser Lampe bank; and the University of Luxembourg’s Interdisciplinary Centre for Security, Reliability, and Trust. Mina is notable for claiming to be “the world’s lightest blockchain,” consuming external data without the use of an oracle.

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