To reveal or not to reveal? This is starting to become the question when it comes to data on the blockchain.
Transparency and immutability might disable control of data by large power structures, but at the individual level there remains a desire for personal ownership. A balance must be achieved.
Is it naive to think of playing both sides? Power to the people, please; in both directions: let's free all information from the iron grip of the big monopoly, but let's exercise a little personal autonomy over our different parts.
Is this too much to ask? It's not. However, freeing user data from company control should not open the door to criminal activity.
Crypto mixers have allowed individuals to regain ownership of their transactional data. Fortunately, they lose 1-3% of the value to anonymize a transaction. It’s what crypto users want, need, or deserve, so they use them. Great. But now everyone mixes together – the clean and the dirty. It is therefore inevitable that major legislation will come forward to investigate.
In October, the Financial Crimes Enforcement Network (FinCEN) proposed regulating crypto mixers as “a major concern when it comes to money laundering”. There have always been concerns about the ability to encrypt and mask the origin of funds, but the weight behind them has recently intensified. Binance was pursued by Israeli hostages to enable the financing of Hamas, and FinCEN also reported on Use of Bitcoin in child exploitation and human trafficking. It goes without saying that something must be done.
FinCEN's intervention, while justified, could result in excessive reporting and inconsistencies that penalize innocent everyday economic activity. The desired balance between transparency and data ownership will be even more disorienting.
The Blockchain Association also underlines that “overly broad anti-money laundering requirements could driving digital asset businesses to other, less regulated countries. In this case, there would be a blowback in which U.S. law enforcement would have even less access to information about suspicious activities.
It’s clear that a widespread crackdown on exchanges, mixers, and protocols could do more harm than good. US credit unions call for some level of compromise — suggest changes to the frequency and limits of reporting and recordkeeping. But intermediate solutions from external sources are still not enough and still not suitable.
The onus falls on those immersed in the blockchain space.
While Chainalysis has recently reported a decrease In terms of the value and volume of cryptocurrency crimes in 2023, there is still no denying the level of clean-up that remains to be done. If Web3 wants autonomy in transparency and data ownership, it needs accountable mechanisms that foster authenticity and trust from within. To filter illicit activities, we must prevent and cure.
Prevention must be the priority. I always wondered: why open the door to criminals in the first place? Most exchanges and mixers let the illicit parts in, but don't let them out when they want to go out. This is clearly inefficient: they can simply stay put and send money inside the protocol, thereby putting other users' wallets at risk.
This may change. Don't let them in. We need mass adoption of smart bouncers. Smart contracts based on Chainalysis can act as an intelligence agent guarding the gates of an ecosystem. All transactions received by a wallet can be verified immediately, and any funds of illicit origin are automatically exposed and redirected. There is no need to allow an ecosystem to infiltrate in the first place. Additionally, examining specific transaction details allows protocols to trace the flow and source of funds.
If protocols, ecosystems, and exchanges deployed this strategy at scale, Web3 would do its due diligence and FinCEN would not need to intervene. These preventative measures would further reduce the volume and value of illicit activities at all levels.
And beyond prevention? Back it up with the selective transparency cure. Innocent and honest users should be able to decide which data points they wish to reveal or conceal. If the system is filtered consistently and thoroughly, users should be able to entrust their own data. ZK proofs and off-chain calculations allow them to hide transaction details from the public while sharing them with trusted parties. The autonomy to be revealed on request must be left to the end user.
Instead of fearing, complaining and protesting the interference of centralized crime enforcement, the Web3 community should take responsibility. The involvement or non-involvement of FinCEN and other external regulators is in our hands.