Financial privacy and regulation can co-exist with ZK proofs — Vitalik Buterin

Vitalik Buterin published research on privacy pools using zero-knowledge proofs to enable financial privacy while allowing users to prove dissociation from illicit funds.

The paper discusses an extension of Tornado Cash's approach that would let users publicly prove sources of funds on-chain.

With privacy pools, users can exclude themselves from anonymity sets that include addresses tied to illegal activities.

The idea is for users to prove membership in custom association sets satisfying regulation without revealing full transaction graphs.

The paper provides examples of how law enforcement could allow privacy while still identifying illicit sources of funds.

The authors argue privacy and regulation don't have to be incompatible if protocols enable proving properties about funds' origins.