zkKYC in DeFi: An approach for implementing the zkKYC solution concept in Decentralized Finance

Pieter Pauwels; Joni Pirovich; Peter Braunz; Jack Deeb

Paper 2022/321

zkKYC in DeFi: An approach for implementing the zkKYC solution concept in Decentralized Finance

Pieter Pauwels, Joni Pirovich, Peter Braunz, and Jack Deeb

Abstract

Decentralized Finance (DeFi) protocols have triggered a paradigm shift in the world of finance: intermediaries as known in traditional finance risk becoming redundant because DeFi creates an inherent state of “trustlessness”; financial transactions are executed in a deterministic, trustless and censorship resistant manner; the individual is granted verifiability, control and sovereignty. This creates challenges for compliance with jurisdictional Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) regulations, including Know-Your-Customer (KYC) policies, given that no personal information should be shared and stored on public, transparent blockchains. This paper presents a solution concept for where a DeFi protocol is required or finds it desirable to implement KYC policies. zkKYC in DeFi requires no personal identifiable information to be shared with DeFi protocols for the purpose of regulatory transparency. The presented approach extends the zkKYC solution concept (which leverages self-sovereign identity and zero-knowledge proofs) with the introduction of KYC Issuers and Decentralized Oracle Networks (DONs) as key solution components. KYC Issuers verify the identity of an individual, but have no knowledge about their digital asset wallets or DeFi activity. DeFi protocols interact with digital asset wallets, but have no knowledge about the identity of the individual controlling them. If and when deemed necessary, only a designated governance entity is able to reveal the identity of an individual that is under strong suspicion of being a bad actor in a DeFi protocol. The presented solution architecture demonstrates flexibility in being agnostic to blockchain platforms and SSI implementations and extensibility in being forward compatible with on-chain identity and reputation systems. Similar to the original zkKYC solution concept, zkKYC in DeFi breaks the regulatory transparency vs. user privacy trade-off.

Metadata

Available format(s): PDF
Category: Applications
Publication info: Preprint. MINOR revision.
Keywords: zkKYC decentralized finance (DeFi)privacy AML CFT know-your-customer (KYC)zero-knowledge proof (ZKP)self-sovereign identity (SSI)
Contact author(s): pieterpauwels @ protonmail com
History: 2022-03-08: received
Short URL: https://ia.cr/2022/321
License: CC BY

BibTeX

@misc{cryptoeprint:2022/321,
      author = {Pieter Pauwels and Joni Pirovich and Peter Braunz and Jack Deeb},
      title = {{zkKYC} in {DeFi}: An approach for implementing the {zkKYC} solution concept in Decentralized Finance},
      howpublished = {Cryptology {ePrint} Archive, Paper 2022/321},
      year = {2022},
      url = {https://eprint.iacr.org/2022/321}
}