Ethereum’s Buterin co-authors proposal to balance blockchain privacy, regulation

Privacy Pools may be a way to find an equilibrium between privacy and regulation

article-image

Alexey Smyshlyaev/Shutterstock modified by Blockworks

share

A new research paper co-authored by Ethereum co-founder Vitalik Buterin delves into the ways in which blockchains can remain both private and compliant with government regulations.

The paper comes during a notable period of friction between the use of permissionless networks and government agencies wishing to expand their oversight of such activities. Last month, two co-founders of the EVM-compatible transaction mixing service Tornado Cash were charged by the US government. 

The paper’s authors — Buterin, as well as Chainalysis chief scientist Jacob Illum, University of Basel professor Fabian Schär, doctoral candidate Matthias Nadler of the University of Basel, and Spankchain co-founder Ameen Soleimani — contend that good and bad actors could be distinguished through the use of a “smart contract-based privacy enhancing protocol” dubbed Privacy Pools.

Privacy Pools uses zero-knowledge (ZK) technology and enables users to generate a new withdrawal address that can’t be linked to previous transactions. 

It also lets users choose their own privacy settings — meaning they can exclude any suspicious users from their transactions. This can be achieved through Merkle roots. 

The authors note that their intention is to find cooperative solutions between lawmakers, regulators and practitioners across various fields to ensure that privacy-enhanced infrastructure can thrive in an otherwise regulated environment.

“We argue that the proposal is quite flexible and can be adapted to potentially satisfy a

large variety of regulatory requirements,” the authors wrote. “The paper should be seen as a humble contribution towards a potential future in which financial privacy and regulation can co-exist.”

Inside Privacy Pools

Any crypto asset created and spent on a blockchain possesses a coin ID (or hash) associated with it. This information is stored using a Merkle tree, a data structure through which each hash is linked to another hash in a tree-like structure. 

Numerous transaction hashes are stored in a block, and each block is also hashed, creating a Merkle root.

In tandem with zero-knowledge tech — which enable blockchains to prove that data is accurate without revealing the information itself — users can prove that their withdrawals are made through a previous deposit. At the same time, they’d only reveal information from a limited data set of their choosing. 

This means that honest users can prove that the origins of their funds are not directly tied to criminal activity. 


Get the news in your inbox. Explore Blockworks newsletters:

Tags

Decoding crypto and the markets. Daily, with Byron Gilliam.

Upcoming Events

Old Billingsgate

Mon - Wed, October 13 - 15, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Research Report Templates (2).png

Research

We’re bullish on the PUMP token. We believe Pump.fun's brand strength, existing integrations, product roadmap, and strategic levers justify PUMP's TGE valuation, and expect the token to re-rate meaningfully higher in the months ahead.

article-image

Securitize CEO Carlos Domingo says institutions are eager to get exposure to tokenization

article-image

Trade isn’t war and prosperity isn’t a contest

article-image

Data shows frontrunning has declined on the network compared to last year

article-image

Industry watchers weigh in on what’s coming for bitcoin, M&A and tokenization before the year wraps

article-image

“We are open 24/7/365, but good luck getting an employee to pick up.”

article-image

BitVM3’s “garbled circuit” approach faces critical security and scaling research before it will be practical