On-Chain Privacy Is Key to Massive and Wider Adoption of Crypto

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Innovations in the crypto space appear daily. Whether through decentralized applications or new ways to implement and use non-fungible tokens (NFTs) in decentralized finance, blockchain technology is innovating at the speed of light. The only thing missing? Widespread adoption. One thing that holds this back is the very public nature of blockchain. DeFi, as it currently operates, lacks privacy. In order to catalyze wide adoption for businesses, governments, and individuals, those performing blockchain transactions should expect regular and consistent privacy.

First, we need to define what privacy means. This does not mean the pseudonym, which the cryptocurrency claims to have now. Meaningful privacy means that a personal financial account will not be traced and an individual’s wealth will not be exposed. This means that a company can protect trade secrets. Confidentiality means that a government’s finances are the business of its people, not the business of dangerous neighbors.

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Cryptocurrency is just that – a currency. With the convoy of Canadian truckers and the Russian war on Ukraine bringing a change in the crypto mood, it will continue to be treated like a currency whether or not it is regulated as such. It is a financial asset, and our current understanding of personal financial privacy supports the move towards privacy in DeFi. The European Union has adopted the General Data Protection Regulation, to which any Internet entity operating within the EU is liable. At a more traditional level, fiat banks have several privacy protocols, many of which are subject to human error. Privacy is natural and often worthless until it is taken away.

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Privacy is Crucial for Enterprise Crypto Transactions

It is impossible to deny that corporations and large traditional financial institutions are turning to crypto, with news that giants such as Commerzbank are applying for crypto custody business licenses. Corporate treasuries are beginning to see the benefits of using crypto to solve a problem that has plagued them for decades: instant cross-border payments. The lack of privacy for these transactions will delay wider adoption because until the privacy of these institutional transactions is secured, it will remain a niche offering.

Companies have the right to protect trade secrets, including those related to finances and payments to employees and contractors. Hedge funds, which will benefit enormously from the transfer of assets to the blockchain, must be able to protect their financial movements. If every movement of assets can be tracked, private companies are unable to protect themselves and competition is diluted. It is just as reasonable to expect confidentiality in business as it is for individuals. As crypto sees wider adoption, it will continue to be delayed at every stage until the privacy issue is resolved.

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Privacy does not threaten regulation

The good news is that privacy in DeFi can be both responsible and secure. We all know that regulation is growing, and as frustrating as they can be for the Wild West of blockchain projects, guardrails can allow for growth. People don’t trust something they don’t understand, so when regulations come in, they signal that people running governments know what’s going on and what needs to be monitored. It’s a Well thing. Governments can – and should – regulate crypto exchanges, fiat in-and-out routes, and people subject to local, state, and federal laws wherever they reside. Privacy does not threaten or disable regulation. Governments are codifying privacy on social media. Why should financial networks be an exception?

The bottom line is that once DeFi is secure and can be used privately, people will feel more comfortable with crypto. Because people don’t trust something they don’t understand, we need to invite them using the expectation paradigm that accompanies other financial endeavors. Another way to invite people into the space is to decouple the privacy argument from the anonymity discussion. This will help solve the problem that new adopters face when they mistakenly see crypto as an easy way to facilitate illegal transactions. Until there is a reasonable expectation of privacy, DeFi will remain a risky business for individuals and businesses.

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This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of TNZT.

Kieran Mesquita is chief scientist at Railgun, a decentralized smart contract project that brings privacy to cryptocurrencies that work seamlessly with DeFi. He has extensive experience in developing technologies for blockchain and DeFi projects. He was an early adopter of Bitcoin and one of the first people to develop its GPU mining software.