The document discusses the concept of privacy pools in cryptocurrency, proposed by Ethereum co-founder Vitalik Buterin, meant to balance transaction privacy with regulatory compliance. Privacy pools utilize zero-knowledge proofs to confirm the legitimacy of transactions without revealing identities, and they categorize wallet addresses to distinguish between 'good' and 'bad' depositors. Although privacy pools aim to maintain user confidentiality while satisfying regulatory oversight, their effectiveness in reassuring regulators depends on trust in a vetted source's assessments.

1. By: www.ProfitableInvestingTips.com

2. The monstrous losses incurred by many during crypto
winter and the financial shenanigans that come to
light changed a lot of minds about crypto
regulation. Nevertheless, folks doing business on
the blockchain would still like some privacy.

3. An idea that has attracted attention is the use of
privacy pools. What are privacy pools and how
would a privacy pool work? Can these balance
privacy and regulation to a degree that everyone is
happy?

4. What Is a Privacy Pool?

5. The idea of privacy pools comes from one of the co-
founders of Ethereum, Vitalik Buterin. His research
paper on this subject focuses on maintaining
compliance with coming regulatory requirements
while including features that provide privacy. His
work includes contributions from University of Basel
researchers, Jacob Illum of Chainalysis, and Ameen
Soleimani of Tornado Cash.

6. The goal is to isolate categories of transactions so as
to separate lawful activities from criminal ones.
Ideally this would provide proof to regulators that
one’s crypto funds are not intermixed with those of
criminals. The technique at the core of this idea is
a “zero knowledge proof.”

7. What Is a Zero Knowledge Proof?

8. The rationale of this technique is to provide a piece
of information about a crypto transaction to a
regulator. That piece of information would indicate
that a transaction was legitimate and not criminal.
It also would not identify the person or persons
involved in the transaction.

9. This would be done using cryptography. Such a proof
would demonstrate that a transaction was not
associated with an address that was itself
associated with illegal activity. At the same time
this process would maintain the privacy of those
involved in the transaction.

11. Sorting Out Good From Bad Crypto Wallet Addresses

12. Another aspect of privacy pools would be association
sets. These would be cryptocurrency pool wallet
address subsets. The rationale would be to include
only so-called good depositors and exclude “bad”
depositors. What regulators would see would be
that “good” sources were involved in transactions
and not “bad” sources.

13. Trusted third parties would be responsible for
analyzing or evaluating these association sets and
contributing wallets within the pool. The
technology involved would be that currently used in
transaction analysis for anti-money laundering
operations.

14. Inclusion Versus Exclusion Proofs for Privacy Pools

15. This means that transactions would be analyzed and
sorted based on evidence of low and high risk. Low
risk transactions would go into the inclusion or
membership group and others would be excluded.

16. What this involves is looking at lots of transactions
related to individuals wanting entry into the privacy
pool. A person would need to be “clean” in regard
to where transactions came from or went to. A
single bad transaction could exclude a person from
entry into a group.

17. Would Privacy Pools Provide Privacy and Satisfy
Regulators?

18. Except for the trusted source that audits the pool, a
privacy pool would appear to provide what it says it
will. This would be like a bank that does not
disclose information about its depositors but has
the information, nevertheless. What this sort of
pool would not provide is complete and utter
privacy because it would need to satisfy regulators.

19. Regulators would like crypto exchanges to know their
customers. Even though the exchange keeps such
information private, it is available to regulators.
Such would be the case with a crypto privacy pool.
It remains to be seen if regulators will be satisfied
with the word of a “trusted source” other than
themselves!

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