About this talk
This talk presents an exploration of the historical interplay between privacy and compliance in finance, with a focus on how blockchain technology can address these challenges. The speaker, a CTO at Dusk, discusses the evolution of banking from ancient times to the modern period, highlighting key developments such as the emergence of private banks and the introduction of regulations responding to events like 9/11 and the 2008 financial crisis. They emphasize the limitations of traditional financial systems, which have become increasingly surveillant, and how cryptocurrencies, while offering some privacy, also face transparency issues. The speaker introduces the concept of using zero knowledge proofs to achieve a balance between privacy and the need for compliance, noting how this innovative approach allows for secure and private transactions. The session concludes with a vision for the future, where programmable compliance through smart contracts can reshape privacy in finance.
Full transcript
Hello everyone. Ah, it's a nice crowd. Uh, thank you all for coming. I'm uh hand over CTO at Dusk. I'm not allowed to shield Dusk, so I'm going to do it anyway. Uh, Dusk is a layer one uh permissionless uh public uh blockchain protocol and we focus primarily on the issuance of securities on chain. So these problems that I'm going to talk about specifically uh merging confidentiality
and compliance is one of the things I've been working on for 6 years now. And uh uh yeah that's what my presentation will be about. But uh just to make you all aware, apologies if you're thinking this is going to be a tech talk because it's going to be a history lesson. So uh apologies for that. I think this one is not working. for centuries uh privacy
in finance was sort of a given. Uh one of the reasons uh for this was mostly practical because nobody was going to get business if all the public information from the business was going to be leaked. So uh privacy in finance has been there in banking for a long while. Uh you can see here you can see here uh a ledger a past ledger like it was
used in uh the olden days and uh yeah the bank fold everyone knows what the bank fold is these days everything is digital but uh uh bank folds were the primary way of storing uh financial wealth in the past. So um I'm going to start with ancient banking but before I go to banking one of the more important things that was uh happening before is when we
were hunter gatherers one of the things that was of course the case is people didn't trade a lot there was no reason to really trade right um fast forward uh when uh the hunter ghetto period was over and people started making cities people had a need to trade um goods uh is when finance came into play and finance and banking are really strongly tied together historically speaking.
Uh currency as well. So you saw the first currencies before this time actually in the form of grains being traded uh seeds uh later on silver and gold became a very well-known currency to trade uh goods because at some point it's not not that practical to have one cow and trade it for 1.7 sheep for example, right? Uh it doesn't really uh work that well. So um
what happened at a certain uh moment in time is uh people started accumulating a lot of wealth and what do you do when you have a lot of wealth? That's a risk for you, right? Like you're not going to store a lot of bars of gold in your home and suddenly have someone come in and steal all the gold. Uh it's also not a practical from a
trading point of view. So in uh in the ancient times in Babylonia, so one of the first um recorded periods in which this happened uh people started storing wealth in palaces in uh in in churches and temples. Uh those were the first centralized faults as we know them, right? Uh so with that came also the first loans. Now loans as a financial tool um wasn't that common
but it did happen. So it could be in the form of grain, silver, gold and uh this happened not necessarily through banks. Uh those did come about around this time especially at the the ending period of this but often this was done through private individuals. Now there are some recorded instances in ancient Greece for example where they did have uh loans in place. So um yeah it's
it's quite interesting how uh how long we've had these concepts in place. Now uh private banks held deposits of people and they issued loans as well and they kept account records of people right and these private banks were uh the first ones that came about around uh especially I think in the Roman ancient Rome uh there you had the first private banks. Now medieval banking here is
where things started to change a bit and where you also get some form of cryptography a very small one but uh it came about so um recordeping was kept inhouse uh it was private and in-house uh by bankers and bankers kept their own ledgers. Now in these ledgers uh if you leaked the ledger you had a big problem because in some cases it could lead to exol
or even execution. Uh in this time we still didn't have any sort of regulation uh like we know it today, right? But uh you did have some laws that protected uh uh certain individuals that were high risk and that were doing some uh uh banking. And one of the interesting things about this as well is they started doing coded ledgers. So the person that was in the
ledger was sometimes hidden. uh pseudonyms uh were put in place or there were some forms of very very basic uh encryption but all of this was based on trust. Everything was Uh now what you get later on is um in the 1800s the world starts to change massively. we get industrial revolution uh we get uh urbanization and people start to specialize more and more and at some
point uh due to the specializations people need to trade more and this is when uh the banking systems as we know them come into place right uh a bit more sophisticated uh banking systems and we also see the first laws coming in place the first compliance regulations um and this is in the 1800s when you see nation states being built uh are the sort of prerequisite towards
uh getting uh legislation in place. And then later on in the 1900s, you really see this ramp up for multiple reasons. Um in the case of these um these early banks, uh the the reasons for doing this were a bit different from uh from what we'll see later on, but this is mostly consumer protection, right? So protecting people that deposit funds from losing their funds. uh the
Swiss in 1934 introduced the Swiss banking act and this really codified privacy. So it was completely illegal to disclose any client information. Uh they were the first to do this. It was already a sort of standard in the industry to do this but they really codified it in law. Um they basically set the gold standard for uh for privacy. Uh one of the things they also allowed
in the law and which is uh quite illegal everywhere else is uh numbered bank accounts. So what this does is basically gives you a number and if you are can prove that you are the owner of the account belonging to that number uh you can uh access uh default. Uh this is still done there. It's illegal everywhere else but uh they still use it. Uh and so
today here's where we got uh to the compliance part and how uh privacy um starts to become an interesting meeting uh together. So in the 2000s a lot changed. There were a lot of uh uh very important developments. One of the most important ones is probably 9/11. Uh this one was really key on uh financial crackdowns of terrorism financing. So one of the reasons why uh there
was a heavy crackdown on privacy is of course uh terrorism financing. Um and later on when you see uh the 2008 financial crisis there's more regulations for consumer protection because a lot of the privacy that was in place in the in the system uh also led to abuse that led to the kind of uh uh more esoteric products financial products that came into being in the 2000
age. So this is a period where you see a lot of shift. But as an answer towards this shift and also what central banks did with issuing more funds is you see the the coming up of crypto and crypto is very different from from banking where before you had privacy basically a trust privacy relation uh with bankers. Uh now this moves toward technology right technology that guarantees
there is uh no trust needed in the system. But one of the problems of course with systems like Bitcoin and Ethereum is the transparency problem. So what you have here is yes you have pseudonymity but you can see who has what funding and this is a problem if you want to do certain activities like for example uh if you have a business you don't want your full
ledger to be visible right uh you don't want to see every trade that's being done and how much inflow and outflow you have. Uh so the question is uh we've seen this this this walk through history right we see that there is uh privacy since the beginning there is a lot of trust in place but recently we've seen a lot of innovation going towards uh a decentralized
setup uh system where you don't need to have trust in uh in the system uh where there are multiple people that that are verifying that indeed what's happening there is legitimate and um you cannot really manipulate this easily On the other side, you see a lot of regulatory development. So, people want to uh to break down this privacy thing and banking has turned into a big surveillance
machine. Like it's probably the biggest surveillance machine that's out there. Uh banks the amount of information they have and that they can process it's uh it's quite astounding. Uh they can analyze every transaction. They have thresholds in place. So, can we have both? Can we have this privacy in a system and at the same time be compliant with regulations with regard to uh for example uh terrorist
financing or whatever you have right um because too much privacy regulators will reject it they want certain information right they want to see that you can uh that you do not overspend and where the money came from uh and on the other side too much transparency is something that institutions can't do because do for us it's nice to know like what Warren Buffett is going to buy
in 10 seconds, right? Uh because we can frontr run that information. But uh for him it's not that ideal because he doesn't get the deal he wants, right? Uh so the challenge is balancing these two. Uh so one of the solutions we have in place at Dusk for example is we use zero knowledge proofs. Uh but we also use blockchain technology, right? We use blockchain technology uh
for the for the trustlessness. So you don't need to trust the system. The money that is in the system is being verified by a decentralized group of validators. So check it. Um and on the other side, we use zero knowledge proofs, which is basically a way to verify that something is true without revealing the actual underlying information. I'm not going to go too deep into the technical
details. We have people here that know that a lot better than me. Uh but we use this technology to prove that something is true without revealing those details. The data is encrypted, for example, on the blockchain. um but it's publicly verifiable that it is correct. Now we heavily use this uh for our security standard but also for transfers on a network. Uh and this is one solution
to do it right. So one of the things that we do is we have a security standard and in the security standards uh when someone trades the trade is hidden right so all you say is okay I have a transfer going on am I allowed to transfer a certain given amount it's proven off chain and then verified onchain and all you see is the proof and you
don't know its contents now that's nice that's fine and all but there's still some problems here right like I can do a private the transfer, but a regulator does not really know can this person do the trade like is this person known to who is doing the trades or uh auditors cannot really make reports around this because there's a lot of legislation around the reporting right and
what we build into the system is of course the capability to do this. So what we have we have specific roles where people in a group uh can decrypt the information and then uh reports can be generated for it but only the people that need to know can see this information. Um, one example for in in our case also on the network is because we have privacy
transfers. Uh, a lot of the privacy networks that are out there that we see like Zcash and Monero, what they do is they allow you to send money without knowing how much is being sent, but you don't know where it came from. And that's sub-optimal, right? Like I have to prove if I make a transfer to a bank transfer, I have to prove like, hey, where what's
the source of funds? But you cannot do that in these networks. But we uh built that into a system that only the participants for example can see what's going on. And uh this this allow this already is a key uh thing to make uh compliance happen right. Uh so and the other thing is of course confidential uh smart contracts. So this technology zero knowledge proofs can be
used in our contract platform. Uh so the future of privacy in finance uh we see that there's a lot of things going on in uh in in traditional finance that gets away from the privacy part. You still have privacy with other participants in the network but there are a lot of people that can see what's going on. Um and on the other side blockchain is completely transparent
except when you use more newer uh more innovative uh solutions like uh the zero knowledge proofs that we use. Uh so GDPR and fund rolling challenges can be solved with this technology. GDPR because you can have private profiles where you can prove that you were a certain person without revealing your identity on chain. Uh and on the other side because the transfer of value is hidden. Uh
the front running challenges go away because you can still do certain frontunning attacks but you don't know what the result is. So financially it's not worth for you to do it. It's at your own risk. Uh and of course we have uh programmable compliance. So what currently happens is uh if your bank is asking you hey uh where did the money come from? Uh or you start
to on board with a bank they ask you hey are you a terrorist? Well of course I'm not I'm going to answer I'm not a terrorist. Um even if I might be one right uh I don't know maybe I'm a financial terrorist I don't know. Uh but with uh this technology with a blockchain you can codify these sort of rules. you can make those rules part of
the system and then they're ingrained. They are inherent in there. So if you for example uh do KYC with a trusted party and they issue you uh onchain uh proofs that say that you were a specific person that's KYC then you can start doing onchain activities then you have already codified it into a smart contract. So I think that what we are building, what we have been
building for the last 6 years and what other people are also experimenting with is going to be the future of privacy and finance. Codifying these rules into smart contracts into trustless systems is going to be the future. So to me it's it's not one or the other. It's a balancing act, right? And we can do both. the technology is already out there to do both. Now, it's
just a matter of seeing it happen in mass adoption. That's my talk. Thank you. [Music] I'm not sure I'm not sure if you have time for questions, but uh yeah. Okay. I'm getting a green light, so if anyone has any questions, uh feel free to shoot. No one. Okay, thank you. [Applause]
