Protecting Privacy Is Paramount to Realizing Blockchain's Business Potential

It's been almost 16 years since blockchain emerged from its esoteric fringes to enter global discourse

It’s been almost 16 years since blockchain technology began emerging from its esoteric fringes to enter global discourse, most recently seen in the continued backing from Wall Street incumbents.

Despite this remarkable ascendancy, the unfortunate truth is that the technology still hasn’t yet realized its true potential for businesses. A core challenge remains: Too much sensitive data is still left unshielded in the public domain.

The essence of the issue is that companies must keep their business data confidential, and people endeavor to protect their personal information to the best of their ability. However, once data is placed on a public blockchain, it becomes forever and irrefusibly visible.

Even if a business takes every possible precaution to obfuscate data, errors made by others or vulnerabilities in the system can still expose sensitive onchain data or metadata, including the identities of participants. This can then lead to privacy breaches, non-compliance or both, ultimately defeating the core assumption that blockchain is trusted and highlighting the importance of strong measures to protect sensitive data.

On the other side of that coin, concealing activity on a blockchain can open the door to money laundering, which will trigger swift and negative government responses. Instances in which this has occurred have led to a false impression that governments oppose Web3 privacy, a criterion businesses fundamentally need for them to adopt the technology.

From whichever angle we look at it, maintaining privacy onchain is a real and pressing issue for Web3. Until we solve it, businesses will not, and should not be expected to, cross the chasm.

The belief that governments oppose privacy on the blockchain is wrong

Web3 entrepreneurs have come to fear that building decentralized applications and businesses that provide financial anonymity could land them in regulatory trouble. Just consider Samourai Wallet, whose co-founders were charged with money laundering, or Tornado Cash, whose developer was sentenced to 64 months in prison for similar reasons.

This fear has been furthered by the light sentences handed down to those involved in major DeFi scams, such as those who defrauded investors in the "PlusToken" scheme, which saw four individuals receive sentences ranging from four to six years for defrauding investors out of an estimated $3.2 billion. In comparison, the sentences for those involved in the FTX fraud, which are still ongoing, are highly anticipated due to the massive scale of the scam.

These responses have led to a consensus that governments are opposed to privacy when it comes to blockchain. However, this couldn’t be further from the truth.

Governments do not oppose privacy but mandate it across industries. Data protection laws, like the General Data Protection Regulation or the Health Insurance Portability and Accountability Act, are in place to ensure businesses protect our customer data from misuse and security threats.

The real issue that these high-profile cases highlight is that Web3 measures to protect data have created opportunities for misuse, enabling the facilitation of criminal activities. This has understandably raised serious concerns on behalf of governments.

These capabilities should not undermine the cross-jurisdictional laws that governments enjoin to protect the global community from terrorism, human trafficking, fraud and other criminal offenses.

This begs the question: What does privacy, done right, look like?

Selective disclosure

When it comes to using blockchain, the methods used to protect sensitive data typically include keeping the data offchain or encrypting data onchain. The latter is not a durable form of privacy given the rapid advances of quantum computing in breaking encryption.

However, the advent of zero-knowledge (ZK) technology, a complex cryptographic technique, allows users to ensure sensitive data remains offchain by sharing attestations about the validity of the data instead. In Web3, ZK has emerged as a transformative way to enhance privacy as it enables untrusted parties to validate that a transaction has occurred without sharing any information about the transaction.

Decentralized applications can exercise selective disclosure by choosing between putting data onchain (full disclosure), putting it onchain with encryption (disclosure via viewing keys) or using ZK to only publish attestation about the data (offering utility without any disclosure).

But, selective data disclosure solves only half of the puzzle. It was not designed and cannot account for metadata.

The next privacy frontier

Metadata, the information surrounding our data, is a largely unaddressed component of blockchain’s exposure of sensitive information; it can be used to make inferences, creating an added layer of vulnerability even when the data itself is concealed.

For example, through transaction metadata, investment and trading strategies can be inferred in addition to other behavioral patterns. For businesses, the implications of this can be detrimental to their growth and ability to stay ahead of competitors. They cannot afford to have trade secrets and strategies, or even the identities of other parties they are transacting with, exposed.

The pressing need to protect metadata and remove the ability to make inferences is paramount to security and can be addressed using a private token. However, such capability can be easily misused for money laundering.

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