Onchain Privacy for Institutions

Transcript

[applause] >> Thank you so much. I am Tomer Weller, not Tomer Yeller, although I do often yell. Sorry about that. Um so hey, I'm Tomer, Chief Product Officer at the Stellar Development Foundation, and I've been in crypto for almost 9 years, and in the past couple of years, uh really focused on privacy and talking a lot with institutions about their requirements. Uh so this talk is about what we've learned in discussions with institutions about privacy.

So if you're in this room, you are probably already sold on privacy. But just to level set, blockchain is the only financial system in which every transaction is visible. So your paycheck um is usually private, your bank balance is private, but the moment any of these move on chain, they're completely visible to everyone. For individuals, this means anyone with a block explorer can reconstruct your entire financial history. If you're an institution, it's even worse. It means that volumes, relationships trading um strategies, payroll, everything is completely out there in the open for your competitors to look at.

So when we talked to financial institutions, they make it clear that not having a way to manage your visibility is a non-starter. Well, you're probably thinking that's easy. We've been working on privacy in blockchain for the past 10 years. We must have a solution, right? Well, kind of. You see, the thing is that we've been working on privacy for a while, but really focused on the cypherpunk values. So complete financial freedom, which is awesome. I love Zcash. But for this next wave of adoption, we really need institutions.

And we need them to feel comfortable bringing their assets, making payroll, accepting merchant payments, engaging with blockchain in a meaningful way. For these institutions, privacy means something different. It means managing visibility in a way that allows them to stay competitive and compliant. It's nuanced. So, the mistake is that we've built absolute privacy, but what institutions are telling us is that they want something uh that sits on a spectrum.

Because privacy is a spectrum. It's not a binary. It has an enormous number Sorry. [clears throat] Of permutations. It varies by jurisdiction. It varies uh a regulated asset issued in the US is different from one issued in Singapore and Brazil. It's varied by use cases. So, payroll has different requirements from trading, which has different requirements from remittances. Technology varies. So, ZKP, FHE, MPCTE's, all the three-letter acronyms, all these technologies has different have different trade-offs.

Different performance, different trust assumptions, different things that they can actually keep private. And so, the real problem is that we've been building privacy as a single on and off feature, whereas a matter of fact, it's a multi-dimensional design space. So, when we started looking at privacy for Stellar, we realized that most privacy solutions today end up in what I call end up >> [cough] >> Sorry.

So, when we started looking at privacy for Stellar, um we realized that most privacy solutions end up in one of two privacy dead ends. One of them is the all or nothing dead end. So, these are privacy solutions that have two modes, full transparency or full full privacy, nothing in between. So, this can take the shape of a smart contract pool, an L2, an app chain, but the premise is the same, all or nothing. Now, unfortunately, this doesn't leave room for nuance. Thank you so much.

This doesn't leave room for the nuance that regulated financial financial institutions need in order to engage with it. The other dead end are permission chains. So, I've been in crypto for almost 9 years, and these things, unfortunately, keep coming back. So, uh and recently, they've been coming back with a pretense of being private. Well, you know, yes, they're private. They're private because they're a database on someone's computer. These often are indeed private, but just to be clear, institutions are looking for open participation networks. They're looking for the type of interoperability,

composability, verifiability that open networks give them. So, permission chains are a privacy dead end. So, how do you avoid these privacy dead ends? Well, we suggest a very simple privacy stack. And first of all, the base layer should stay open and auditable. So, transparency first. This might come as a surprise given that this is a talk about privacy, but um transparency is a feature, not a bad not a bug. The fact that an executive um at an asset management company can open a block explorer and look at their circulating supply and what's going on with an asset, we want to maintain that.

That is a feature, and institutions love that. On top of the base transparency layer, we want to add building blocks for privacy. So, the base layer should provide primitives that enable privacy without enshrining any specific type of privacy. So, we've seen L1s try to enshrine privacy. Um sometimes it ends up with bugs, and sometimes it just ends up with launching something that is obsolete off the get-go. So, with Stellar, we took a building blocks approach. We launched product protocol x-ray earlier this year, and protocol x-ray um provides a very extensive set of ZK building blocks so

that you can build your own privacy layer on top of it. And that's the final layer, privacy protocols on top. Different protocols for uh different privacy guarantees, different administrative controls, different underlying tech. And most importantly, there will be many of them, and that's okay. So, we keep talking about privacy, but I want to focus on private payments because there's a lot of interesting things happening that are not payments, uh trading, DeFi, etc. But, payments are really the building blocks for modern finance, and these are the things that we need to get right first.

So, we're seeing two main families of private protocols happening, private payments protocols, happening these days. The first one is confidential tokens. So, confidential tokens hide the what? The payment amounts and the balances are concealed, but the sender and receiver are still visible on chain. You know who's transacting, you just don't know how much. Now, this is great for uh counterparty relationships that I already know. For example, when I'm getting payroll, everyone knows that I'm employed by SDF, but we still want to want to hide the actual amounts.

Uh there's a lot of work going in the space. Stellar is part of the Confidential Token Association um and we're working with Open Zeppelin on an implementation. Uh we're seeing more projects coming from Solana, Aptos, uh Sui. Um a lot of activity in the space. Um Confidential tokens provide a narrower set of a privacy guarantee, but what they provide is fairly easily to build compliance around and to scale. So, we're seeing a lot of adoption for that. The other option is privacy pools.

So, uh privacy pools are payment protocols that hide the what and the who. So, funds are mixed so that the senders and receivers are not visible outside. So, they provide anonymity, not just confidentiality. Some notable examples are um Oxbow in the Ethereum ecosystem and in Stellar Nethermind have just launched Stellar Private Payments, which is their own open source solution. So, privacy pools are have a much stronger privacy guarantee, but they inherently mix funds. So, this means that legitimate funds can sometimes get commingled with illicit funds, which there are ways to tackle and I'll

talk about that in a bit. So, you know, this demonstrates that there are different systems, different privacy guarantees, and now the question is, how do we build administrative controls around them? So, at Stellar, we've been uh working with various builders in the space to define a compliance menu of options, app opt-in administrative controls. Now, the aspect of compliance is intentional. I'm not a lawyer, and the regulators have not been kind enough to tell us what compliance on a blockchain on chain actually looks like quite yet.

But, these are the administrative controls we're starting to see as requirements. Not a comprehensive list, and the idea is to have these as configurable opt-in as needed. So, the first one is selective disclosure. In selective disclosure, the user chooses to reveal specific information to a specific party. This allows the user to show a source of funds on demand. And it's a very powerful primitive. It's been around for a while, actually, ever since Zcash launched. But, unfortunately, we haven't really seen a lot of adoption for it quite yet. Hopefully, these will come to fruition.

Non-selective disclosure allows a third-party auditor, like an issuer or a protocol operator, to hold a key, a view key, that can view all transactions within a specific scope. This ensures that if law enforcement um has a subpoena, they actually have a door to knock on to get access to this information. Association sets have been pioneered by uh privacy pools, and these allow are allow lists that are controlled by a pool operator. So, they ensure that all funds that are mixed uh come from addresses that have been vetted.

But, what happens if uh an address was vetted and then later discovered as problematic? For that, we're seeing forced transparent withdrawals. So, these address the issue of an asset that has previously previously been authorized, and now it is not. So, it it forces the user or the address to quit the pool without maintaining any privacy guarantees. This was pioneered by Oxbow. They call it rage quit, and we're seeing more and more of these type of solutions. Finally, we're seeing clawbacks. Yes, clawbacks. So, if clawbacks are a triggering word for you, then I apologize, but you're in the wrong room.

Institutions are looking for these things. So, tokenization is at full swing right now, and regulated assets often needs an option to claw back. If we want to see RWA issuers engage with privacy protocols as a first-class primitive, they need to have clawback capabilities. So, this menu is just a starting point. It lets you compose the type of compliance that you need for your asset, for your service.

If you're in this room and this menu is offensive to you, come talk with us. We can work through this. This is still getting built. We need your help. So, just to wrap it up. In crypto, we've been building privacy that's been ideology first. But, it's not enough. Institutions need privacy and it's a lot more nuanced than that. There's no single answer and that's okay. Privacy is a spectrum. The right approach is transparency first, keep the base layer open, provide the low-level building blocks, and build configurable privacy on top.

Confidential tokens, private payments, all the administrative functionality that you need. And finally, all the building blocks are already in place. So, we have a non-hostile administration in the US. We have institutions that are at the table ready to build. And more importantly, the tech is and has been ready for quite some time. So, there are no excuses. We're building privacy that doesn't break the chain. At Stellar, if that's interesting to you, come talk with us. Thank you very much.

>> [applause]