Can Blockchain Privacy Be Responsible? | CSQ

One of the cryptocurrency’s biggest selling points is that it gives users anonymity through pseudonyms. The blockchain is designed to be a decentralized and trustless system, meaning that no single entity has full control over it. This in turn is what gives users anonymity, allowing them to transact without revealing their true identity.

While the data on the activity of crypto wallets is available for public viewing online, none of these wallets are directly linked to the offline identities of their owners. Or more so, they are tied, but one has to go through a lot of digging to find out who these people are in the real world.

However, blockchain anonymity has raised a number of eyebrows, significantly from governments around the world, as the value of illicit cryptocurrency use rose to a new all-time high of $20.6 billion in 2022, a study conducted by Chainalysis revealed. So where is the line between the right to anonymity and accountability?

In general, it can be perceived as a difficult situation, as the anonymity of such systems tends to step on the toes of the business and legislation of banks and other financial systems. These organizations must follow certain rules such as anti-money laundering and know your customer.

The Bitcoin and blockchain space emerged from anarchy and libertarian thinking, which nurtures a deep distrust of government and financial institutions. While blockchain technology aligns with these philosophies by allowing for decentralized systems that are not controlled by any central authority or government, this also prevents cryptocurrencies from gaining mainstream adoption where accountability is one of the key requirements.

In addition, anarchy is often associated with chaos and lawlessness, which may pose a further threat to the global adoption and regulation of blockchain technology. Meanwhile, libertarian thinking can sometimes conflict with the need for regulatory oversight to protect consumers and ensure fair competition in the marketplace.

On the other hand, concerns arise about large technology companies monitoring users’ online activities and potentially violating their privacy for commercial purposes. These concerns swing the pendulum in the opposite direction.

This brings up ideas of inventing a “middle ground”, where people who want to retain their privacy and have full control over their identity on the blockchain will still be able to do so, but will also be able to interact with others with trust and security and have possibility to identify oneself if necessary. This could also open up more opportunities to ease regulations around cryptocurrencies.

And while this all sounds good on paper, one of the biggest concerns in the virtual space is the use of false identity, or identity fraud – so can this “middle ground” actually be implemented?

In fact, some blockchain systems have already implemented a design that allows selective disclosure of information – certain parties such as auditors and regulators can access specific data while other parties can remain anonymous. One such blockchain is Concordium.

Concordium balances privacy with accountability through its protocol-level ID layer that ensures that every wallet registered on the blockchain is associated with a real identity that has been verified through a third-party ID provider. In this way, people and businesses can trust each other while remaining private.

However, it is important to note that the ID layer is under the user’s full control and the amount of personal information that can be disclosed can be tailored to what is relevant in the situation.

This could be a great way to bring less stringent regulation to blockchains as authorities would be able to access a user’s identity only after having a court order or using a legislative mandate. In addition, users have full control and choice to reveal only those aspects of their identities that they wish to be made public, meaning that they and their actions can remain as private as they wish.

This is made possible by the use of cryptographic techniques such as proof without knowledge. These encrypt data and transactions on the blockchain, making them private and anonymous.

This is the right balance between self-surpassed ID under a user’s own control and privacy – but also reliable disclosure of private information and accountability.

I believe these are essential features for a well-functioning future economy, much of which will eventually take place in virtual environments.

Lars Seier Christensen is a Danish businessman, entrepreneur and investor. He is the founder of Concordium.