Regulators are cracking down on privacy-preserving protocols like cryptocurrency mixers, but zero-knowledge (ZK) proofs could offer a solution for both developers and regulators.Offering privacy-preserving features in a legally compliant manner is among the biggest concerns of today’s privacy-focused blockchain protocols, which can be used by virtually anyone with internet access.However, the evolution of ZK-proofs, along with other privacy-preserving paradigms, like decentralized identity verification systems, could help protocols maintain privacy and ensure they aren’t servicing any terrorist organizations or money launderers, according to Matthew Niemerg, co-founder and president of AlephZero.In an interview with Cointelegraph, Niemerg explained:Regulatory compliance became even more critical for privacy-focused protocols on May 14 after Dutch authorities sentenced Tornado Cash developer Alexey Pertsev to five years and four months in prison for allegedly laundering $1.2 billion worth of illicit digital assets on the platform.The sentencing was handed down despite Tornado Cash being a noncustodial crypto mixing protocol — meaning that the funds that go through the protocol are never held or controlled by it.In a promising development for open-source code developers, ZK-proofs could be used to guarantee that none of the cryptocurrencies on a set platform were previously related to any illicit activities, according to Niemerg:With a decentralized Web3 identity for each user, ZK-proofs could be used to verify that funds and wallets are unrelated to criminal activity while maintaining the user’s anonymity.However, Niemerg noted that both ZK-proofs and decentralized identity systems need more development before facilitating such complex functions.Related: Coinbase recovers after system-wide outage, but user withdrawals remain offlineFinancial privacy is not a crimeFor AlephZero, helping developers build compliant privacy tools is a priority, according to Niemerg:Financial privacy has been a growing concern since 2022 when the United States government blacklisted Tornado Cash for alleged money laundering. The concerns intensified on April 24 after the arrest of the Samourai Wallet founders. The cryptocurrency wallet’s CEO, Keonne Rodriguez, and chief technology officer William Hill will each face one count of conspiracy to commit money laundering and one count of conspiracy to operate an unlicensed money-transmitting business.The arrest was classified as an attack on crypto privacy pioneers, according to Ki Young Ju, founder and CEO of CryptoQuant: Related: Pre-launch token trading 20 times more volatile than post-launch trading — Keyrock
