As the Web3 industry matures, there is a growing debate about zero-knowledge-know-your-customer (zkKYC) as a way to enforce strict financial regulations while preserving user privacy, according to a partner at an investment firm.
In an interview with Cointelegraph, John Henderson, partner at Australian venture capital firm Airtree Ventures, said the successful implementation of the zkKYC system would be “good news for both regulators and consumers” and could increase the use of cryptocurrency:
“Organizations and retail users are more likely to participate in DeFi if they are confident that they are complying with their AML/CFT obligations.”
Henderson explained that the zkKYC system will allow users to prove certain things about themselves to service providers without having to reveal personal details such as names or identity documents.
In theory, sharing this information will be sufficient to meet the regulatory requirements for combating money laundering (AML) and terrorist financing (CTF) for the cryptocurrency industry:
“[The system] includes a trusted third party that verifies my personal information and then issues an encrypted proof of my personal wallet, which I can then share or share the attributes with with financial service providers.”
The advantage of this approach is that if the security of a service provider, such as a cryptocurrency exchange, is compromised, no personal information can be leaked, Henderson argues, and identity documents can only be retrieved at the request of the authorities.
Many in the crypto community are critical of how some crypto platforms handle personal information.
The community recently shared their concerns after court documents released on October 5th revealed the personal information and transaction history of thousands of Celsius customers, with some warning that it could be used by dox users.
Calls for better privacy for individuals were also high at the Converge22 conference in September in San Francisco.
Jeremy Aller, CEO of StableCoin Issue Circle, has expressed the need for “improvements” in technologies that verify identity and credentials while protecting people’s privacy.
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However, Henderson acknowledged that “storage of sensitive information remains an unresolved problem,” and shared two ideas on how to manage that information:
“One idea is for trusted people to store identity documents outside the network and pass the identity verification to the network, without the original documents. Another idea is to sign a wallet transaction with a regulatory institution, which will then register that account with an identity.”
Despite the challenge, Henderson was adamant that the zkKYC protocol would form “the building blocks for online reputation outcomes” by enabling “more useful” financial products and services.
“My priority is to convert 100 million users into crypto,” he said. “If we want to expand online, we need an AML/CTF compliant solution.”
On April 13, Airtree Ventures raised $4.7 million in an initial round of a decentralized, independent organization reputation organization aimed at providing financial reputation and identity services for decentralized finance (DeFi).
