Privacy-Preserving KYC

The foundational cryptographic primitive enabling users to prove they possess verified credentials (e.g., age, residency) without revealing the underlying data. A user generates a proof that their data satisfies a specific rule (e.g., 'over 18'), which the verifier can check without learning the actual birth date.

• Example: Proving citizenship without showing a passport number.
• Key Property: Completeness, soundness, and zero-knowledge.

Allows users to reveal only the minimum necessary information for a transaction. Instead of submitting a full identity document, a user can disclose a single, cryptographically verifiable claim.

• Example: Disclosing only 'age ≥ 21' for an alcohol purchase, not name or address.
• Contrasts with traditional KYC, which typically requires full document submission and storage.

Digitally signed, tamper-evident claims issued by a trusted authority (e.g., a government or licensed KYC provider). These are the cryptographic building blocks for proofs.

• Structure: Contains claims, issuer signature, and metadata.
• Standard: Often based on the W3C Verifiable Credentials data model.
• User Control: Credentials are stored in a user's digital wallet, not centrally.

Ensures that transaction history and wallet activity cannot be linked back to a user's real-world identity, even after KYC verification. The proof of compliance is separate from the on-chain address.

• Mechanism: Uses stealth addresses, ZK-proofs, or privacy pools to dissociate identity from blockchain activity.
• Goal: Prevents chain analysis from deanonymizing compliant users.

Relies on a decentralized network of accredited and audited entities to issue the initial Verifiable Credentials. The system's trust is rooted in these issuers, not in the protocol itself.

• Role: Issuers perform the initial, off-chain identity verification.
• Redundancy: Multiple issuers prevent single points of failure and censorship.
• Examples: Sygnum Bank, Fractal ID, and other regulated providers.

Mechanisms to invalidate credentials if they are compromised or expire, mimicking real-world ID cards. This is a critical challenge in privacy-preserving systems.

• Methods: Cryptographic accumulators, revocation lists with ZK-proofs, or time-based expiry built into the proof.
• Importance: Maintains the integrity and freshness of the KYC state without revealing which specific credential was revoked.

The core cryptographic primitive enabling privacy-preserving KYC. A Zero-Knowledge Proof allows a user (the prover) to convince a verifier that a statement about their data is true (e.g., "I am over 18" or "My ID is on a valid list") without revealing the data itself. This separates proof of compliance from data disclosure.

• Example: Using a ZK-SNARK to prove citizenship without showing a passport number.
• Key Property: Completeness, soundness, and zero-knowledge.

A principle where users reveal only the specific, minimal attributes required for a transaction. Instead of submitting an entire identity document, cryptographic credentials allow the extraction of a single claim.

• Mechanism: Uses verifiable credentials and ZKPs to prove isolated statements.
• Use Case: Proving you reside in a specific jurisdiction for regulatory compliance, without revealing your full address or birth date.

Defines where the verification logic and data reside.

• Off-Chain Verification: Identity attestations (credentials) are issued and verified by trusted entities off-chain. Only the proof of verification (e.g., a ZKP) is submitted on-chain. This keeps sensitive data off the public ledger.
• On-Chain Verification: The verification rules (circuits) are deployed on-chain, and proofs are verified by smart contracts. The identity data itself remains private with the user.

The system relies on Trusted Issuers (e.g., governments, licensed KYC providers) who cryptographically sign claims about a user's identity, creating Verifiable Credentials. The user then holds these credentials in a digital wallet and can generate proofs from them.

• Decentralized Identifiers (DIDs): Often used as a standard for issuer and holder identifiers, enabling interoperability without central registries.

A major application layer for privacy-preserving KYC. ZK Rollups can batch thousands of transactions and submit a single validity proof to a base chain (like Ethereum). This architecture can be extended to include KYC proofs.

• Process: Users prove their KYC status to the rollup's prover. The rollup's validity proof then implicitly verifies that all included transactions came from KYC'd users, without leaking their identities on the base layer.

Balancing privacy with anti-money laundering (AML) requirements like Travel Rule. Cryptographic techniques can address this:

• Minimal Viable Disclosure: Revealing only the legally mandated info to regulated VASPs.
• Auditability: Using view keys or regulation-friendly ZKPs that allow authorized auditors (e.g., regulators) to decrypt transaction details under specific conditions, preserving privacy for all other parties.

This model replaces traditional KYC with verifiable, on-chain credentials issued by trusted entities. A user obtains a verifiable credential (e.g., from an identity provider) and presents a cryptographic proof to the DeFi protocol. Key applications include:

• Permissioned liquidity pools: Only users with a 'verified' credential can deposit or borrow.
• Collateral whitelisting: Access to specific, higher-risk asset pools requires proof of accreditation.
• Cross-protocol portability: A single credential can be reused across multiple platforms without re-submitting documents.

Core privacy principles ensure only the necessary data is shared. Instead of uploading a full passport, a user proves a single, specific claim. In lending, this enables:

• Age-gated products: Proving 'age > 18' for certain financial products.
• Geographic compliance: Proving 'residency in Country X' for licensed services without revealing an exact address.
• Reputation-based rates: Leveraging anonymous, aggregate repayment history from other protocols to determine credit terms.

Privacy-preserving KYC architectures balance where data is stored and verified.

• Off-Chain Verification with On-Chain Proof: Identity is verified by a trusted provider off-chain, which issues a ZK-proof or signed attestation stored on-chain for the protocol to check.
• Fully On-Chain (Soulbound Tokens): Non-transferable Soulbound Tokens (SBTs) represent credentials directly in a user's wallet, with privacy maintained via ZK-proofs when the SBT is used.
• Hybrid Models: Use oracles or verifiable credential registries to bridge off-chain trust to on-chain logic.

The Financial Action Task Force (FATF) Travel Rule requires VASPs to share sender/receiver information for transactions. Privacy-preserving KYC enables compliance without full exposure by:

• Using secure multi-party computation (MPC) or ZK-proofs to confirm the counterparty is verified by a licensed VASP.
• Transmitting encrypted data only between compliant entities, not broadcasting it on-chain.
• Allowing auditors or regulators to cryptographically verify compliance proofs without accessing the underlying user data.

Several projects are implementing these concepts in live or test environments:

• Polygon ID: Uses Iden3 protocol for ZK-based verifiable credentials to gate DeFi access.
• Sismo: Issues ZK Badges (non-transferable tokens) as proof of group membership or reputation for sybil-resistant lending.
• Aztec Network: Enables private transactions and could facilitate private proof-of-identity for interacting with lending protocols.
• Circles (UBI) & BrightID: Focus on sybil-resistant, unique human verification for fair credit distribution.

Enabling regulated financial activities on decentralized platforms. Privacy-preserving KYC allows DeFi protocols and DAOs to implement gated access or tiered services based on verified attributes while maintaining user pseudonymity. Use cases include:

• Permissioned Pools: Access to institutional DeFi vaults for accredited investors.
• Compliant DEXs: Adherence to Travel Rule regulations without exposing transaction graphs.
• Sybil Resistance: Proof-of-personhood for fair airdrop distribution and governance. Protocols like Polygon ID and Verite provide toolkits for developers to integrate these checks.

Streamlining international transfers with reduced friction. Traditional cross-border payments require repetitive, invasive KYC checks at each intermediary. Privacy-preserving KYC allows a user to obtain a reusable, portable credential from a regulated entity (e.g., a bank). They can then present a ZK proof of this credential to any participating service provider globally, satisfying Anti-Money Laundering (AML) requirements instantly without re-submitting documents. This is a key focus for projects interfacing with traditional finance (TradFi).

The trusted entities that issue and verify initial claims. This layer consists of regulated KYC providers, governments, financial institutions, and professional organizations that act as issuers of verifiable credentials. Examples include:

• Traditional KYC Providers: Sumsub, Jumio integrating ZK-proof issuance.
• Government-Backed IDs: Digital driver's licenses or national eIDs issued as VCs.
• DAO Credentialing: Proof-of-membership or contribution attestations. Their role is to perform the initial due diligence and cryptographically sign the resulting credential, establishing the trust root for the entire system.

The capability to reveal only specific, necessary attributes from a credential, rather than the entire document. This is a critical privacy feature enabled by ZKPs and VCs.

• Mechanism: Using zero-knowledge proofs to create derived proofs about subsets of data.
• Use Case: Proving your country of residence from a passport credential without revealing your passport number, name, or photo.

Several projects and consortia are actively deploying Privacy-Preserving KYC:

• Mina Protocol's zkKYC: Uses zk-SNARKs to prove KYC compliance.
• Polygon ID: Offers self-sovereign identity using ZK proofs and blockchain.
• The Travel Rule Protocol (TRP): Aims to enable compliant crypto transactions using privacy-preserving attribute checks.
• Banking consortia like BIS Project Aurora explore MPC for cross-border KYC checks.

Adoption faces significant regulatory hurdles. Authorities like the Financial Action Task Force (FATF) mandate Travel Rule compliance, requiring VASPs to share sender/receiver info. Privacy-preserving solutions must demonstrate they meet these compliance obligations (e.g., proving a transaction is not with a sanctioned party) while protecting data. The evolving landscape includes guidance notes on the use of digital identity and cryptographic verification.