Why Are Privacy and Compliance So Important?

Since its inception, blockchain has been defined by “openness and transparency” as one of its core features. Anyone can view on-chain transactions, fund flows, and address balances, creating unprecedented trust in the crypto market. However, as blockchain expands into mainstream finance and interfaces with institutional capital, a fundamental contradiction emerges: financial operations require transparency, but they also require privacy.

This chapter will examine, from the perspectives of regulation, asset security, institutional needs, and user privacy, why ZK (zero-knowledge proofs) are becoming the key technology to resolve the conflict between privacy and compliance in the crypto world.

The Inherent Conflict Between Blockchain Transparency and Financial Privacy

In traditional finance, privacy is given. Banks don’t publicly display your account balance, brokers don’t show all your transaction records, and funds don’t reveal real-time asset flows. These protections safeguard users, institutional strategies, business secrets, and compliance requirements.

But public blockchains operate differently. On blockchain:

• Transaction records are public

• Address balances are public

• NFT holdings are public

• DeFi operations are public

• Historical transactions are permanently immutable

This transparency builds trust, but also creates two major problems:

1. User privacy is fully exposed

Any on-chain action can be tracked by analytics firms (like Chainalysis) or hackers, and addresses can even be linked to real-world identities. This poses risks for individuals, companies, and institutions.

2. Institutions cannot handle sensitive operations on public chains

For example:

• Banks cannot publicly display client assets on-chain

• Market makers can’t reveal their positions or strategies

• Businesses can’t expose payroll addresses

• Crypto funds can’t show investment research or rebalancing data

These challenges have kept “institutional DeFi” from scaling up.

Regulatory Compliance: Transparency ≠ Full Disclosure

Regulators don’t require all information to be made public; rather, they care about that:

• Financial institutions can prove compliance

• User identities are verifiable and traceable

• Sources of funds can be proven clean

• Key transactions are auditable

While blockchain transparency enables auditability for regulators, excessive openness violates privacy laws and data protection rules (like GDPR, Hong Kong PDPO, EU MiCA, etc.). Regulators’ stance is: “You must be verifiable, but you don’t need to expose all your information.”

This is exactly where zero-knowledge proofs provide a solution.

Crypto Regulation Evolves: Controllable Privacy Becomes Consensus

With stablecoin legislation, MiCA, and other policies coming into force, a new trend is emerging: regulators no longer oppose privacy technology, they only reject “uncontrollable anonymity.”

In other words:

• Compliant privacy is acceptable

• Unverifiable anonymity will be restricted

As a result, more regulatory frameworks now discuss:

• Selective disclosure

• Audit-viewing keys

• Revocable anonymity

• ZK-based KYC/AML systems

From the U.S. “stablecoin transparency requirements,” to EU MiCA’s limits and exemptions on transaction privacy, to Singapore and Hong Kong’s exploration of institutional DeFi platforms. The message is clear: privacy is no longer at odds with regulation; it’s becoming an integral part of compliant infrastructure.

DeFi and Privacy: The Public Model Has Hit Its Ceiling

Despite rapid growth in DeFi, three key obstacles prevent broader adoption by institutions and mainstream users:

1. Institutions cannot risk exposing their positions

If institutional activity (LPing, lending, market making) is fully visible, it invites front-running (MEV), arbitrage, and fund attacks.

2. Sensitive user information is overexposed

For example:

• Your payroll address, main wallet, and DeFi earnings are all traceable

• Hackers can use data analysis to target high-value accounts

• Users in certain countries may face legal or security risks due to on-chain activity

3. Enterprise Web3 and on-chain payments struggle to scale

Cross-border settlements, supply chain finance, payroll, and business payments cannot operate in a fully transparent environment.

Privacy is thus becoming DeFi’s next growth curve, with ZK technology as its critical foundation.

Why Is ZK (Zero-Knowledge Proofs) Better Suited for Finance Than Other Privacy Technologies?

Previous privacy technologies included:

• Coin mixing tools (e.g., Tornado Cash)

• Privacy coins (e.g., Monero)

• Smart contract mixers

• Privacy sidechains

Their drawbacks were:

• Difficult to audit

• Hard to comply with regulations

• No regulatory viewing channels

• Susceptible to abuse

Zero-knowledge proofs offer a new paradigm: you can prove a transaction meets the rules without revealing its details.

This enables:

• Verifiable compliance for fund sources

• Verifiable identity (KYC) without exposing personal information

• Concealed transaction amounts while proving limits are not exceeded

• Auditable protocols that protect business secrets

In short, ZK satisfies both “privacy requirements” and “regulatory requirements”, a balance no other technology has achieved.

Summary: Privacy and Compliance Are Not Opposites, They’re the Foundation of Next-Gen Financial Infrastructure

As Web3 technology integrates into global finance, privacy becomes an essential concern for every participant:

• Users need to protect their assets

• Businesses need to secure commercial information

• Institutions need to safeguard strategies and data

• Regulators need auditability

• Crypto markets need transparency and trust

Within this complex ecosystem, ZK offers a viable technological path, allowing for transparent systems, compliant rules, and private data at the same time.

This is why zero-knowledge proofs are rapidly gaining mainstream adoption in the financial sector.