Blockchain Privacy: Exploring the Legal Dimensions of Privacy in Digital Finance

Chapter 1: Privacy and blockchain

The term blockchain refers to a distributed database that maintains an immutable ledger of transactions that take place between two parties.  In a way that is both verifiable and sustainable, blockchain documentation and confirmation of pseudonymous ownership of all transactions is carried out.  It is a transaction that is made into a block on the blockchain after it has been validated and cryptographically verified by other participants or nodes in the network.  The information that is contained within a block includes the time that the transaction took place, information about previous transactions, and specifics about the transaction itself.  Transactions are arranged in chronological order once they have been recorded as a block, and they cannot be changed.  Following the introduction of Bitcoin, the initial use of blockchain technology, this technology gained widespread popularity. Since then, it has been responsible for the development of a number of additional cryptocurrencies and applications.

Transactions and data are not checked and owned by a single body, as they are in centralized data base systems, because of the nature of decentralization that it possesses.  On the contrary, the legitimacy of transactions is validated by a method known as the majority rule. This method involves nodes or computers that are connected to the network, and if the network reaches a consensus on the new transaction, then it is added to the network at that time.  Using encryption, blockchain technology ensures the safety of transactions and data while also verifying their authenticity.  The proliferation and extensive use of technology has led to an increase in the number of data breaches that have occurred.  Information and data pertaining to users are frequently retained, mistreated, and misused, which poses a risk to individuals' right to privacy.  The capacity of blockchain technology to improve user privacy, data protection, and data ownership is one of the primary reasons why proponents of the technology are advocating for its wider use.

When it comes to blockchains, the utilization of private and public keys is an essential component of privacy.  Asymmetric cryptography is utilized by blockchain systems in order to ensure the safety of transactions between users.  Every user in these systems is in possession of both a public and a private key.  The sequences of integers that make up these keys are completely random and are connected cryptographically.  When a user is given the public key of another user, it is mathematically impossible for that person to guess the private key of that other user.  As a result, this results in an increase in security and safeguards users against cybercriminals.  Due to the fact that they do not reveal any personally identifiable information, public keys can be distributed to other users on the network.  Through the utilization of a hash function, the public key is used to generate an address for each individual user.  The sending and receiving of assets on the blockchain, such as bitcoin, is accomplished through the usage of these addresses.  Users have the ability to observe previous transactions and activity that has taken place on the blockchain by virtue of the fact that blockchain networks are shared with all members.

The names of users are not disclosed; the addresses of those who have submitted and received previous transactions are used to represent and signify those transactions.  Pseudonymous identities are created through the use of public addresses, which do not expose any personal information or identification.  According to Joshi, Archana (2018), it is recommended that users do not use a public address more than once. This strategy eliminates the chance of a malicious user tracing the history of transactions associated with a certain address in an effort to obtain information.  Through the usage of digital signatures, private keys are utilized to safeguard the identity of users and ensure their safety.  Adding an additional layer of identity identification, private keys are utilized in order to gain access to funds and personal wallets that are stored on the blockchain.  In order for individuals to send money to other users, they are required to submit a digital signature, which is generated when the private key is provided to the particular individual.  Through the use of this procedure, theft of monies is prevented.

Technology known as blockchain emerged as a result of the development of Bitcoin.  A document that explains the technology that underpins blockchains was published in 2008 by the developer or creators who go by the alias Satoshi Nakamoto.  In his article, he provided an explanation of a decentralized network that was distinguished by peer-to-peer transactions including cryptocurrencies or electronic money.  The majority of transactions that are carried out in the modern day involve users placing their faith on central authority to store their data in a secure manner and to carry out transactions.

When it comes to major organizations, a significant amount of users' personal information is saved on a single device. This presents a potential security risk in the event that the system of an authority is hacked, lost, or carelessly handled.  In order to eliminate this dependence on a central authority, blockchain technology is being developed.  In order to accomplish this, blockchain technology operates in such a way that nodes or devices within a blockchain network are able to verify the legitimacy of a transaction rather than relying on a third party.  Every node in the network is informed of any transactions that take place between users in this system. Examples of such transactions include sending and receiving cryptocurrency.  In order for a transaction to be recorded as a block on the blockchain, many nodes are required to verify that the transaction is legitimate.  In order to confirm that the spender did not double spend or spend more money than they actually own, nodes are required to examine the spender's previous transactions.

Proof of work and proof of stake are two examples of consensus techniques that miners implement after nodes have confirmed that a block is genuine.  These protocols make it possible for nodes to achieve a consensus regarding the sequence of transactions and the total number of transactions.  A transaction is considered to be a block once it has been validated and published on the blockchain.  After it has been formed, a block cannot be changed in any way.  There is an enhancement in user privacy as a result of the decentralized nature of blockchain technology and the absence of the requirement for a central authority.  Users are able to exercise control over their data using peer-to-peer networks, which reduces the risk that third parties will sell, keep, or otherwise distort their personal information.

One party, known as the prover, can demonstrate to another party, known as the verifier, that a certain statement is true by the use of a cryptographic technique known as a zero-knowledge proof, also abbreviated as ZKP. This approach does not involve the transmission of any information other than the fact that the statement is, in fact, true.  The prover does not divulge any information regarding the transaction in any way whatever.  For the purpose of enhancing the level of privacy in blockchains, such proofs are often implemented into blockchain systems through the utilization of ZK-SNARKs.  Typical non-private public blockchain systems, such as Bitcoin, have a block that stores information about a transaction. This information includes the sender's and receiver's addresses, as well as the amount for which the transaction was sent.  Clustering methods can be utilized in conjunction with this public information in order to establish a connection between these pseudo-anonymous addresses and corresponding users or identities in the actual world.  The usefulness of such techniques is significantly diminished due to the fact that zero-knowledge proofs reveal nothing about a transaction other than the fact that it is valid.  One of the most well-known examples of a cryptocurrency that makes use of ZK proofs is Zcash.

Ring signatures, which are utilized by Monero, are yet another mechanism that can be utilized to conceal the flow of transactions on the public blockchain of cryptocurrency.

There is also the possibility of using bitcoin tumblers as a means of enhancing privacy, even in the context of a pseudoanonymous cryptocurrency.  It is also possible to incorporate the mixing of public addresses within the blockchain system itself as a mechanism, similar to how Dash does it. This would eliminate the need for mixers as an additional service.

At the beginning of August 2022, the United States Department of Treasury imposed sanctions on the well-known mixing service Tornado Cash. The Treasury Department accused Tornado Cash of laundering $455 million worth of cryptocurrency that had been stolen by the Lazarus Group.  The sanctions made it unlawful for individuals, businesses, and residents of the United States to make use of the