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Privacy laws might prove to be a blessing in disguise for crypto

Cointelegraph | Vyara Savova  | Sep 13, 2020

privacy and the blockchain - Privacy laws might prove to be a blessing in disguise for cryptoWith government agencies getting more savvy at tracing blockchain transactions, laws like the EU’s GDPR may play a role.

Anti-establishment and counter-government sentiments fuelled the early days of crypto. More than a decade later, crypto is slowly moving away from its wild-west early days and into a more organized system that traditional financial institutions are reluctantly adopting.

Crypto has also managed to attract the no less reluctant attention of various regulators. With reactions ranging from a complete ban on crypto transactions to making authorities question the overall role of regulation, cryptocurrencies have wreaked havoc on policymaking everywhere.

So far, regulators have mostly focused their attention on positioning digital assets within existing financial regulations. However, experts in other areas of law have started developing interest in both cryptocurrencies and the technology behind them. Concepts such as decentralized digital identities and securely storing data on the chain have served as an introduction to blockchain technology for many lawyers.

An introduction that has brought with it yet another promise is that of private transactions on a blockchain. As highlighted in the Bitcoin white paper, privacy was of great importance to Satoshi’s vision of a purely peer-to-peer electronic currency.

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This promise influenced both Bitcoin’s use as a seemingly untraceable payment method and the emergence of many blockchain projects. It has, however, proved to not just be greatly exaggerated but simply untrue, leaving regulators and authorities alike in the uncomfortable position of having to figure out what to do about it.

The fallacy of private crypto transactions

The solution put forward in the Bitcoin white paper was that by anonymizing public keys, transactions will still be visible, but without identifying the parties. This promise of anonymity has led to a certain level of comfort among people transacting on the chain.

This sense of security culminated in the broader adoption of Bitcoin for transactions on the dark web. The practice eventually led to some high-profile arrests and sentences, such as that of the founder of Silk Road. As police got more involved, the crypto community started seeing the cracks in crypto’s “anonymity.”

The concept of anonymity is under a greater threat amid the continuous improvement of blockchain analytics tools. The compliance software market keeps getting bigger, and the products more elaborate. Even so-called privacy coins haven’t been spared by the increasingly sophisticated analytics capabilities of services such as Chainalysis. Nonetheless, some crypto users still consider their transactions untraceable and their actions on the chain private.

Data protection outside the chain

Cryptocurrency users weren’t the only people with privacy and data protection on their minds. With more or less the same incentives — protecting people’s privacy in an increasingly digital world — policymakers around the globe had started working on data protection regulations. The vision was to cover both the risks of most activities moving online and the increasing concern of private actor interference and state surveillance. No other place was as determined to provide all-encompassing privacy legislation as the European Union.

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After years of discussions and negotiations, the General Data Protection Regulation, or GDPR, was born (i.e., EU-wide legislation with a direct effect on citizens in all member states). Since its full adoption in 2018, the GDPR has been central to numerous privacy-related investigations and court cases. The most recent and, arguably, the most important has been the European Court of Justice’s so-called Schrems II judgement against Facebook.

One court decision with significant consequences

In a nutshell, the Schrems II decision revolved around determining the legitimacy of Facebook’s EU data transfers to the United States. The court not only decided that some cases of transferring EU citizens’ data to the U.S. were illegal but also invalidated the legal mechanism many companies were using for EU–U.S. data transfers — the Privacy Shield. The reason the ECJ gave was that ongoing surveillance practices by the American government weren’t compatible with EU data protection regulations.

Data protection doesn’t work on the chain 

Even before Schrems II, blockchain infrastructures were not considered very privacy-friendly due to the dispersion of the entered information across all blocks. This dispersion makes important data protection rules, such as the right to erasure and the right to be forgotten, which are practically impossible on the chain, as they require all reference to specific personal data to be removed.

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Another reason why privacy isn’t necessarily compatible with hash-based, indelible infrastructures is that data protection isn’t technology agnostic. Both its protection and violations depend heavily on the technological tools at hand. And technological tools tend to improve exponentially with time — if encryption is to serve as an example, what was once a state-of-the-art encryption mechanism can now be broken without much effort.

The ability to identify a specific person also depends on a combination of technical tools available and information accessible. This means that even if a person is using a privacy coin, such as Zcash or Monero, their wallet address can potentially be found if there’s additional information available; for example, previous transactions from the same wallet address that are traceable.

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