Compliance in Privacy Protocols: How zkBob Ensures Safe and Responsible Usage

zkBob has developed a robust framework to ensure privacy in financial transactions while encouraging responsible usage.

Compliance in privacy protocols
Community Guest Post

Personal Privacy vs National Security

Cybercriminals have racked up over 2 billion over the past 5 years. These illicit activities, traditionally happening with Bitcoin, are now occuring on Ethereum, along with Ethereum’s strong market capitalization in Crypto assets. While Ethereum’s transparency, which has been built into the protocol, is beneficial in many ways, it also invokes privacy issues, which seem to be the most pressing issue in the space.

Although the volume of illicit finance is less than 1 percent of overall transactions, the blockchain ecosystem has seen a steady increase in regulatory activities owing to the volume of illicit activities. The US Department of the Treasury recently published its Illicit Finance Risk Assessment of Decentralized Finance which outlines many of these activities. As blockchain spurs innovation, and makes the use case for having a decentralized bank with individual sovereignty, it's important to have checks in place to reduce illicit activities and bring more trust into the ecosystem to spur mass adoption.

Privacy-preserving mechanisms or apps built on Ethereum have unfortunately been used for illicit activities such as money laundering, posing a serious threat to national security. In this piece, we explore how zkBob achieves personal privacy with built-in features that actively prevent fraud and illegal activity.

zkBob's Approach to Base Layer Neutrality

zkBob is grounded in privacy, anti-censorship, and decentralization. It adheres to base layer neutrality, implementing compliance measures to prevent protocol misuse while allowing base layer participants (validators, sequencers, relayers, etc.) to operate without additional measures like censoring sanctioned addresses. This approach maintains blockchain ecosystem integrity and prevents protocol misuse, reinforcing zkBob as a trustworthy and responsible player in the crypto space.

zkBob: A Zero Knowledge Privacy Application

zkBob is a privacy application deployed on Polygon and Optimism that uses zkSNARKS to anonymize senders, receivers, and amounts during fund transfers. It does not shuffle cryptocurrencies like a crypto mixer, which blends users' cryptocurrencies to obfuscate their origins and owners. Instead, zkBob uses zkSNARKS to provide privacy by anonymizing transactions, making it fundamentally different from a crypto mixer.

A crypto mixer is a service that blends the cryptocurrencies of many users together to obfuscate the origins and owners of the funds. The service is intended to protect privacy of the users in Ethereum, due to to its public nature. But, if it does not have any built in compliance, it can be used for illicit activities. Chainlink has pointed out how even mining pools can be used to obfuscate origin and act as a mixer. 

zkBob Responsible Usage Framework

zkBob has developed a robust framework to ensure privacy in financial transactions while encouraging responsible usage. This comprehensive framework is built on four key pillars:

  1. Screening of Deposits and Withdrawals: zkBob imposes limits on deposits and withdrawals to prevent illegal activities. New users have default limits, but KYC-completed users or businesses can access higher tiered limits. zkBob, integrated with TRM Labs, screens wallet addresses for prior high-risk or suspicious behavior. Addresses with suspect activities cannot deposit or withdraw from zkBob.
  2. Optional KYC for Increased Limits: Completing KYC allows users and businesses to access higher deposit and withdrawal limits, enabling high-volume transactions while reducing risks of money laundering and other illicit activities. zkBob has integrated with Know Your Cat for KYC verification. 
  3. Frictionless Transfer for Low-Value Transactions: zkBob enables frictionless transfers for low-value transactions, which do not require any KYC. This feature facilitates most regular DAO operations and is further enhanced by the introduction of private payment links.
  4. Selective Deanonymization: zkBob allows users to disclose the history of their transactions at their own will. This feature provides users with the flexibility to maintain their privacy while being able to disclose their transaction history when necessary.

Together, these four pillars form the foundation of zkBob's approach to ensuring privacy while promoting responsible usage of its protocol.

Instilling Trust in Users

zkBob has invested over two years in research and development to craft a privacy-centric application with built-in compliance measures. This dedication underpins our commitment to earning user trust. Central to the application is the responsible usage framework, designed to safeguard all transactions on zkBob.

Instilling trust in the zkBob application will catalyze the adoption of private transfers, a key step towards wider web3 adoption. This will help reclaim the privacy lost in recent decades due to the monetization of user data.

Safeguarding Sovereignty

Navigating the space where privacy is a paramount concern and achieving regulatory compliance is a delicate balancing act. Compliant, secure private transfer apps like zkBob ensure financial privacy while working against illicit finance. By instilling trust in its users through built-in compliance measures and a robust responsible usage framework, zkBob not only safeguards individual sovereignty but also fuels the adoption of web3.