Paper 2020/1511

Balancing Privacy and Accountability in Blockchain Identity Management

Abstract

The lack of privacy in the first generation of cryptocurrencies such as Bitcoin, Ethereum, etc. is a well known problem in cryptocurrency research. To overcome this problem, several new cryptocurrencies were designed to guarantee transaction privacy and anonymity for their users (examples include ZCash, Monero, etc.). However, the anonymity provided by such systems appears to be fundamentally problematic in current business and legislation settings: banks and other financial institutions must follow rules such as "Know your customer" (KYC), "Anti Money Laundering" (AML), etc. It is also well known that the (alleged or real) anonymity guarantees provided by cryptocurrencies have attracted ill-intentioned individual to this space, who look at cryptocurrencies as a way of facilitating illegal activities (tax-evasion, ransom-ware, trading of illegal substances, etc.). The fact that current cryptocurrencies do not comply with such regulations can in part explain why traditional financial institutions have so far been very sceptical of the ongoing cryptocurrency and Blockchain revolution. In this paper, we propose a novel design principle for identity management in Blockchains. The goal of our design is to maintain privacy, while still allowing compliance with current regulations and preventing exploitations of Blockchain technology for purposes which are incompatible with the social good.