Elena Nadolinski I Why Crypto has No Privacy Layer I Iron Fish I Pragma Denver 2024

next up we have our second and only other talk for today which is around why crypto and privacy have not really found that perfect match and talking about this topic are going is going to be Elena from ironfish so please give Elena a massive Round of Applause hello okay awesome um cool so I want to talk to you about uh privacy and crypto and why we actually still don't have a solution for it um I got this work I can I can just do I think might be a click missing let's try that 's okay okay so who am I um I've been working on a project called iron fish for quite some time now um Iron fish is a layer one protocol it's a privacy protocol we've been fully m n launch since April of last year uh we're actually the only mainnet launch privacy chain that supports custom assets Uh custom assets as well um and I've been in crypto since like 2019 and so since 2019 I've been trying to figure out how do we can have a privacy layer for crypto um and unfortunately almost five years in we actually still don't have a solution so okay let's say I have a friend uh cartic um and I want to send him some assets um and um you know maybe I don't want to be associated with cartic for various reasons or maybe the fact that the tokens are going to be leaving my account is going to Signal some some some something to the market um maybe I'm a whale U or maybe I don't want to give a future Fisher more information about myself because now they know that they can impersonate cartic and ask more money from me um that and that's not really good either or maybe cartic is my therapist and again I don't want that transaction to be out in the open and available um or maybe simply I just don't want my transactions to be public um and again there's a lot of reasons for why people might want private transactions it's actually a very odd Paradigm that they're not um and there's plenty of other reasons why we might want privacy in crypto for instance Financial in institutions they actually need privacy for them it's not just a moral right it's a necessity for their business um whales do move the market just by placing an order especially during The nft Craze there were actual Bots that would mimic transactions made by certain accounts um donations to campaigns stay with your wallet forever so for instance recently there was a US citizen who was also a Russian citizen from Los Angeles she went back to Russia and she was arrested because she donated $51 to Ukraine um so that stays with you forever your ens name that sometimes people use on Twitter um that is basically a price tag over your head um and then fish speis attacks are way easier with transparency because again if I know more about you and your past transactions I can craft an attack that better targets you um if you ever wanted to do payroll with crypto it's kind of a weird Paradigm to have all your payroll information to be completely out in the open so for the duration of this talk let's focus in this just one goal which is I want to send 20 usdc from account a to account B privately and to make this a little bit more believable because I'm inflation uh 100 is the new 20 so what protocol out there can facilitate this transaction and uh I'm going to give some other caveat so I want this protocol to actually work well and I want this protocol to give the Privacy that the users want and deserve at the price that they actually want and I don't want bad guys to use this protocol too um because I do want this this protocol to have a viable future and if you let bad guys use it then it kind of violates that rule so cryptos has had a number of attempts on privacy um so some of the OG privacy Protocols are these monolithic isolate isolated non-interoperable um protocols that typically only support one asset and so those are things like Monero or zcash or grin beam Etc um and then there's these what I call the Next Generation privacy protocols and those are typically ZK based they're interoperable and they're overall more exciting um but they're not quite there yet so again want to go back to this example I want to send 100 UC from account a to account B privately um what protocol lets me do that and so some protocols have worldclass cryptography but are isolated and not interoperable so for instance even though zcash is has probably the best cryptography out there I can't use zcash to send 100 USC to to cartic that just doesn't work um some protocols use what what like tees which are the same for trust execution environments or enclaves um and I think that's cheating I don't think that's real privacy so I don't think that quite work quite Works um some privacy protocols have actually pivoted away from privacy for various reasons um so for instance if you guys heard of a project called nocturn I thought they had a really cool approach to privacy um and unfortunately a few weeks ago they announced that they're no longer pursuing that goal espresso systems again pivoted way to focus on shared sequencers um and so again we're seeing kind of protocols shy away from privacy and focusing on other things um some privacy protocols have killed off their own products which is a little sad but they will relaunch um and some some privacy protocols have not launched yet so for instance Alo namada p numbra and a few others um are super cool but they're not out yet so I can't actually use them to send my 100 USC uh to cartic um and some privacy protocols like iron fish have launched but again I can't quite use it yet um for my example but I will be able to soon um and some privacy protocols do exist in their chains but they're not quite used and honestly they're not quite they're not quite private there was one privacy protocol that actually came close uh to be to being able to solve my use case of sending that usdc privately and unfortunately it has been Sy and the crazy thing about this is that it actually shows the demand in the market for a privacy protocol because this privacy protocol Who Shall Not Be Named was sanctioned um its governance token was hacked its Founders were arrested and yet right now if you go to defi llama it's still top 50 uh defi protocols with over with almost half a billion locked locked in there um but but I still can't use it right so for privac protocol out there it's like squid games you kind of like look around and you're like oh no am I next um so at this moment in time there's still not a single protocol that I as a you citizen can use to transfer money privately from account a to account B so aside from technical challenges of privacy protocols and those are super fascinating um I'm actually going to talk more about the compliance in the screening section um because that is actually pretty important especially since a lot of us have unlaunched privacy protocols and I think a lot of us are thinking about this of how do we launch a protocol that again has a future and won't let bad guys use it um so really like how do we as developers build a privacy solution that genuinely deters Bad actors and makes Regulators comfortable and we are going to focus on this last one of what makes regulars comfortable um and typically for crypto people are mostly concerned about the SEC so for instance a lot of you know Founders and projects and so on spend a lot of brain Cycles thinking of like how do I write a blog post am I allowed to publish a road map Etc in fear that the SEC May dislike that but we're actually not going to focus on the SEC at all we're going to focus in a couple of other departments um within the treasury Department itself so the treasury Department has a lot of departments underneath it it's actually a huge conglomerate and all of them are equally scary but the two that we're really going to focus on is back and fin sen so we can kind of condense this graph to just these two entities um and these two entities are extremely important and I think every single crypto project should focus on that especially privacy protocol and I'm not a lawyer definitely not your lawyer this is gr oversimplification of all this um but we did spend a considerable amount of time talking to lawyers about all this um and I think all this is actually fairly important so for finsen you can kind of think of finsen as just focusing on the bank secrecy act um and so under this uh sorry of course not yeah so under BSA finser requires that a money transmitter or an MSB um conducts certain reporting rules to report suspicious activity to prevent money laundering or terrorism fin financing or other list activity okay that sounds great but what makes you a money transmitter and by you I mean what makes a protocol or a protocol developer a money transmitter because if you are one then again you have a lot you have to do a lot of these other kind of requirements uh to facilitate that compliance um so you don't actually want to do that so in 2019 Vincent gave us guidance on what this means for privacy protocols in particular which I thought was really interesting um and the tldr of that is that an anonymizing software Provider by itself is not a money transmitter which is pretty great news but then what happened last year in August of 2023 um is that the two tornado cash bounders were arrested and they were indicted with three counts um and count two was actually conspiracy to operate an unlicensed money transmitter business okay so this is gets kind of interesting because they were a protocol and there were protocol developers and now they're being tried as an MSB um that's not good and if you really read the whole court case the tldr of that is that relays provided customers with enhanced anonymity in exchange for a fee um making this fall under MSB requirements because again an MSB is a business that uh provides a service that takes a fee for transmitting value so we can kind of condense this or summarize this um as a protocol that provides users with some service any service that produces revenue is now an MSB and this is kind of scary because it actually uh means that protocols they're not just privacy protocols should really pay attention because technically all bridges and all relays uh can fall under this requirement um if they take fees for the services that they provide of Mo moving money for their users um and even if you don't take fees directly which is kind of what this Core case uded to uh but the protocol's token appreciates and value due to you providing a service that can also count um which again is kind of interesting um because what they argued is that even though even if they didn't take like realer transaction fees if the tour token went up in value because more people used it then effectively you are taking a fee um or taking Revenue um and unfortunately even though none of this is St in stone it makes it really hard for privacy protocols to make partnership or to work with other businesses uh just mostly because of fear so this is largely unresolved and not yet enforced so all this sounds scary but it's kind of still pretty much inlux um and there is something scary actually and so if we go back to this graph the scarier um Department here is actually ofac and ofac kind of deals with sanctions list so a sanctions list basically means if you are us person or entity you do not touch the sanctions list list um and the sanctions list is basically you know uh individuals or even countries who you cannot interact with financially and it's unforgiving meaning that for finson you actually have to uh prove whether or not you had intent to make that crime but for sanctions it's unforgiving in terms that they have no obligation to prove intent of violation if you violated sanctions you are a fault um so then the question is well for protocols and protocol development how do they get around this because we're building crypto to be this Global product where typically we don't put restrictions on who uses it so how how should we think about this um so what is the O requirement for protocols um and they did have some guidance um in the FAQ section of when they sanction tornado cache and they said that privacy preserving protocol where software by itself does not need to have um ofac requirements but then it's kind of kind of josed with them sanctioning tornado and so as a protocol developer this becomes very confusing of how you can actually operate under this um under this set of facts um and so for protocol developers um a US individual or an entity there's a pretty clear requirement that you do need to follow follow effect sanction obligations um so even though your protocol doesn't you specifically personally do because whereas for finson your company might get sued but for ofac you personally get sued and I don't think anyone here in this room wants to go up against the US government regardless of whether or not you think you can win um and so one of the counts that the tornado cash Founders were um were arrested for is this count three which is Con conspiracy to violate basically the sanctions list and the argument here is that since tornado the company ran its own bre layers they received fees from sanction addresses and therefore they have directly um transacted with a sanctioned address and this one is going to be fairly easy for them to prove and out of all the counts this is probably the more serious one that they're facing um so again this actually should be scary for protocols outside of just privacy protocol specifically Bridges and l2s because if you are running a single sequencer there's only one party that's taking transaction fees and you're taking fee from a S address then technically you violated the same thing they did um and same same argument for for Bridges typically Bridges either have a tide Quorum of validators or sometimes they even call them Rel layers um and therefore you're directly falling under the same argument that got turn into cash in trouble okay but really let's just focus on this example I know like we went on this whole tangent um but really again we just want to send money from count a to count B privately um so how do we do this without you know being s use government and do so with good ethics um so instead of looking at like looking at it like this let's break it down in terms of this so you can look at uh interaction with the Privacy protocol