To reveal or not to reveal? That’s starting to become the question when it comes to data on the blockchain.
Transparency and immutability may preclude control of data by major power structures, but at the individual level there remains a desire for personal ownership. A balance must be achieved.
Is it naive to think it can go either way? Power to the people, please; on both counts: free all information from the iron grip of the great monopoly, but let us exercise a little personal autonomy over our individual parts.
Is that too much to ask? It’s not. Nevertheless, freeing user data from corporate control should not open the door to criminal activity.
Crypto mixers allow individuals to reclaim ownership of their transaction data. Fortunately, they lose 1-3% of the value to anonymize a transaction. That’s what crypto users want, need, or deserve, so they take advantage of it. Awesome. But now everyone mixes – clean and dirty. So it’s inevitable when major legislation comes along that needs to be examined.
In October, the Financial Crimes Enforcement Network (FinCEN) proposed regulations crypto mixers as “a primary problem of money laundering.” There have always been concerns about the ability to encrypt and obscure the origins of money, but the weight behind that has increased recently. Binance was indicted by Israeli hostages for enabling the financing of Hamas, and FinCEN has also reported on it The use of Bitcoin in child exploitation and human trafficking. It goes without saying that something has to be done.
FinCEN intervention, while warranted, could result in excessive reporting and inconsistencies that punish innocent everyday economic activities. The intended balance between transparency and data ownership will become further disorienting.
Also the Blockchain Association pointed out that “overly broad anti-money laundering requirements could exist driving digital asset companies to other, less regulated countries.” In this case, there would be a counterproductive effect, with US law enforcement having even less access to information about suspicious activities.
Clearly, a blanket crackdown on exchanges, mixers and protocols could do more harm than good. America’s credit unions called for a level of compromise — proposing changes in the frequency and limitations of reporting and record keeping. But middle ground solutions from any external source are still not sufficient or good.
The onus falls on those engaged in the blockchain space.
While Chainalysis recently reported a decrease In terms of both the value and volume of cryptocurrency crimes in 2023, there is still no denying the level of cleanup that needs to be done. If Web3 wants autonomy over data transparency and ownership, it needs accountable mechanisms that promote authenticity and trust from within. To filter out illegal activities, prevention and healing must take place.
Prevention must be a priority. I’ve always wondered: why would you open the door to criminals in the first place? Most fairs and mixers let the illegal parties in, but don’t let them out when they want to leave. This is clearly ineffective: they can just sit there and send money within the protocol, putting other users’ wallets at risk.
This may change. Don’t let them in. We need mass adoption of smart bouncers. Chain analysis-based smart contracts can act as an intelligence officer guarding the doors to an ecosystem. All transactions received by a wallet can be monitored immediately, with illegally obtained funds automatically displayed and forwarded. There is no need to allow the infiltration of any ecosystem at all. Additionally, scrutinizing specific transaction details ensures that the protocols can 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 have to intervene. These preventative measures would further reduce the volume and value of illegal activities across the board.
And beyond prevention? Support this with the remedy of selective transparency. Users who are innocent and clean should be able to decide which data points to reveal or hide. If the system is filtered consistently and thoroughly, users should be able to be trusted with their own data. ZK-proofs and off-chain calculations allow them to hide transaction data from the public and share it with trusted parties. The autonomy to disclose on demand should be left to the end user.
Instead of fearing, complaining and protesting interference by centralized crime enforcement, the Web3 community should take responsibility. The involvement or non-involvement of FinCEN and other external regulators is in our hands.