Can Privacy and Transparency Coexist in Crypto?

In this edition of the Bloomberg Crypto newsletter: Even crypto luminaries are finding themselves hard-pressed to make privacy and transparency coexist on the blockchain,  writes. 

Dueling priorities

Privacy and transparency are two of the core principles of crypto, despite being relative opposites. Now that it’s time to build again after last year’s distress, developers are busy trying to find the best way for the two to coexist.

Ethereum co-founder Vitalik Buterin this month a new transaction system that would allow users to obfuscate their wallet addresses when receiving assets. Under his “stealth address” idea, the asset transfer would be visible, but you wouldn’t be able to tell who picked it up on the other side — a bit like the virtual credit card numbers that some banks offer for safety when shopping online.

This would serve to the impact of some not-so-private-but-makes-life-easier innovations that have come out in recent years, such as the Ethereum Name Service, which lets investors make up “.eth” usernames for their wallets so transactions don’t have to involve long strings of letters and numbers. 

Elsewhere, a group of developers thinks it’s come up with a way to prove you’re not one of the bad guys when transacting on Tornado Cash, a platform which was put on the US sanctions list last year. Tornado mixes token deposits together in order to hide their transaction histories, making it a popular privacy tool, as well as a handy way for hackers to cover their tracks.

Earlier this month, Chainway — which bills itself as a “crypto founder hub” — unveiled a new tool called “Proof of Innocence,” which is designed to help Tornado users show others that their money didn’t come from a hacker or sanctioned address, even if their transaction history isn’t visible.

The tool would act like a certificate of sorts indicating that Chainway’s code had verified that your original address wasn’t previously marked as bad, without revealing to anyone what that original address was.

While these are two different angles for privacy preservation, there is a sense that the effort may be somewhat futile if the ultimate goal of crypto is to achieve broad adoption by more of the general public. Most people would likely find stealth addresses a bit complex, especially if they have to manage the process themselves. There’s also no sign that Tornado is going to come off the sanctions list any time soon, even with a tool like Chainway’s.

To be taken seriously by regulators as a palatable alternative to traditional banking, crypto is going to need to show it’s making steps toward identity management for requirements like know-your-customer checks. That might mean leaning more into the “transparency” side of the LEDGER than industry luminaries like Buterin may be comfortable with. 

Charting it out

Counting it out

What we’re reading (and writing)

• Wall Street Giants Spy Opportunities Rising From FTX Ashes
• Investors Who Bet on Bitcoin Fund in Retirement Accounts Pay the Price (Wall Street Journal)
• NFTs Coming to Bitcoin Sparks Handwringing About Crypto Purists
• Hong Kong Seeks to Revive Crypto Sector Wrecked by FTX Debacle
• Celsius Examiner Rips Into Crypto Lender in Her Final Report
• Elon Musk Pushes Forward With Twitter Payments Vision (Financial Times)

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