MERGE Madrid 2025 | The Future of Trust: Building Privacy and Compliance Into Programmable Finance

Well, thank you for being here today. We're going to talk today a little bit about the concept of trust in the financial system and how essentially cryptography as a tool for enhancing that trust or removing the challenges and barriers that we face today in society and financial system can come to to be and and and to life. especially when it comes to um digital assets and financial products on chain. So let's start by by talking about you know the elephant in the room right what is the real cost of distrust in the financial system right we spend across financial institutions across governments and regulators over $400 billion dollar just in trying to catch fraud and fraudulent behavior and financial crime activity. That's a huge cost that is not going down.

It's only increasing and it's not about changing or investing into building a new type of system for the financial space but actually to be patching the existing financial space right not going to get into specific criticisms of you know the structures of financial space but let's make sure we understand that there is a huge cost associated to how we do finance today right now what happens is that there is some type of fraudulent activity in the system. Some user of the system intends to be fraudulent. This causes some kind of regulation to be enacted by the government usually because they do want they want to prevent or try to prevent this type of behavior. This in fact imposes strict control over the financial system. It doesn't really prevent it.

It's just going to challenge the usability of this system more and more. It creates user friction, right? Hence why we're all here talking about blockchain because in fact blockchain we all know that reduces this friction quite drastically. Whether it's financial friction, whether it's time friction, whether it's all types of of challenges. And this in fact causes the user to find workarounds potentially technology different technologies or it could be uh loopholes in the system or it could be different types of financials very very complex financial structures etc etc and sometimes this may lead to more fraud right not necessarily by by the same people or whatn not but this is a cycle that we call the the wheel of distrust right this is continuously happening has happened for for you decades and will continue happening unless we unless we enact some change.

Now the hidden cost of this system right is essentially on the one hand we have a centralized system right currently today where the government is in fact seemingly controlling the users of this system by imposing restrictions by creating more and more regulations. But it doesn't provide privacy because as a central party you need to have visibility and transparency over everything that happens in the system. Right? This is the current financial system. Now on the other hand we have decentralized systems right in which we have the ability to feel free to enact our financial freedom.

Right? The problem is that to the eyes of the regulators there is no safety. There is a huge liability in how these systems behave. There could be scams. There could be some chaotic behavior.

There could be a a forfeiting some type of regulation that existed before like insider trading etc etc. These are still not sort of very well understood and regulated spaces. Right? So the idea here is that we need to realize right every one of these entities right like the government the users the institutions they all have a legitimate reason to want what they want right the government really wants safety right but we take it as control because that's the wheel of distrust the people really want freedom to just be and behave but what happens in the eyes of the of the government is usually privacy And we, you know, the government doesn't like privacy because there it leads it can lead to to fraudulent behavior. So what happens is that we've created this gap, right?

The gap is really the trust that is missing between all of these institutions and entities and organizations. And so what we really want to try is to close that gap and just enable the society to to flourish from a place of technology and and not from a place of of trust. Right? Come in our superhero of cryptography now. We call cryptography a superhero here because it's really going to be the tool as we're going to see that is going to unlock this.

First of all, blockchain technology today is completely based on cryptography. Cryptography is the um art of secure communications online, right? Everything that's coming with encryption, signatures, everything that has to do with hash functions and so on is about cryptography. And what happens is that today we've come from a place of being able to encrypt data at rest, to encrypt data in transit. You've I'm sure you've heard of these concepts to now being able to encrypt data in computation.

What does this mean is that I have some data or I have some data that I want to delegate it to the cloud for example I can get the cloud to compute something on my data without actually having access to the data right this is quite revolutionary in itself and it has you know hundreds of implications that we're going to see and and and hopefully take advantage of in this redoing of of our trust system. First of all, it enables verifiable integrity because now you can verify that specific computations have been done properly without actually having to have access to the data. So, as you can already start seeing, it hints to the idea that you can get both privacy and somehow appease the safety of the regulator and the government. That's pretty powerful. And this is going to encompass our trust system, right?

So we want to go from a reactive space or financial space in which today there is a fraudulent intention. There is an execution because there is nothing really preventing that execution and then there is an investigation and detection. That's where most of the money of that we we've we mentioned is going to. And then there is of course reaction and sanctions, right? You're you're hoping that these external incentives will uh you know prevent people from doing this.

But this is economic incentives. It's not really mathematically uh prevention, right? And we really want to go to a place of fully mathematical preventive behav fraudulent behavior in which there is an intention same as in the first case. But in fact, once you're going to try to do this, there is some mechanism that prevents you from doing it if if the specific criteria that you're going to um you know violate is actually violated. And this is where this the idea of proof of integrity comes in.

We'll talk about this in a second as to what is the technology if you've heard of it. But then this is now a prevented execution because this in the context of blockchain you can you can if you're familiar with the terminology the state of the blockchain is not going to be updated right this transaction is not going to be verified by the consensus protocol right because it has violated a certain proof of integrity. It's like if I'm going to spend some bitcoin on the bitcoin blockchain I'm sending the transaction. and I can broadcast the transaction even if I don't have the bitcoin but no one is going to accept it because of course clearly they're verifying whether my you know balance or or output unspent outputs are indeed spent or not and this in fact can also you know trigger a compliance alarm in some sense that you know shows that there is an a person that tried to do some kind of behavior that was illegal in the system and so by unlocking the full power of cryptography we can see that we can get this idea of asset security that is an imperative component not only to governments but really to institutions. Fraud also comes in the context of steal, right?

stealing and theft of of all types of of of financial assets. Compliance, right, which is the idea that like, okay, yeah, you you did not actually violate the rules of this system. And transaction privacy, because transaction privacy is is inherent to the ability to to to perform these financial transactions, right, in our financial systems, not only for users of retail like us, but also for financial institutions, right? We'll talk about an example in a second. And now we're going to and and you can see that in this intersection lives what we call preventive cryptography.

Cryptography has been thought of being as a tool that can bring privacy and can enhance the privacy. And it's usually talked about by you know the cipher punk movement and kind of the crypto anarchist movement and so on. But in fact what you know the paradigm shift we're trying to think here is that not only can it bring actual privacy and enhance the the robustness and security of the system but it can also give the regulators and the people needed institutions needed a peace of mind right because of the compliance because of the asset security by preventing specific behavior and functionality right so this is really what what institutions do not know that they need but it's it's here Right. There is really two major tools that we call uh advanced cryptographic schemes that are going to be in use. The first one is zero knowledge proofs.

You may have heard of it. It's been pretty big in the context of the blockchain space. Zcash uh as a as a coin uh kind of pioneered it in production and you've heard about it, you know, from ZKVMs to ZK EVMs. U all these all these uh systems use zero knowledge proofs and these are really just mathematical truths about statements, right? So you're you're essentially instead of giving a specific statement let's say even just uh you know I'm older than 18 instead of giving you that I'm going to actually show you a proof that says that I was born before a specific year right this enhances the individual data privacy so I don't need to show my actual privacy but I can show you a proof of specific data and it's verifiable by a third party that can in fact be assured mathematically and probabilistically or statistically that it is a true statement Right.

The second tool is a multi-party computation which essentially allows us now to think about data across parties. Right? If zero knowledge proves was really about my own individual data, MPC is allowing you to say well I want to aggregate data across different parties but each party owns this data in a private manner. Right? So let's think about this as risk calculation, credit scoring, lending, all these things that potentially even have to compose financial products across uh different smart contracts for example.

And this allows us to do this in a private way where the output is actually shared and you have this ability to to um have verifiability and visibility of the output across all the parties that participated in the computation and it's in fact computationally confidential, right? Because as we said before, you have the ability to compute on data that not everybody has access to, right? Um, and let's talk just quickly about an example. The idea of dark cryptograph dark pools in in financial ecosystems that are very important because many times large financial trades or or you know financial products can cause shifts in markets or can you know sometimes uh alert competitors as to specific moves in the financial um context and and give up some of the advantage. uh but on the other hand dark pools are a challenge because again you know you don't have the compliance visibility regulators etc etc have posing are can pose uh some some challenges so in this context we would have a an institution sending some type of uh transaction to this darkpool as a cryptographic engine that has this zero knowledge NPC this by the way is already uh built we actually have this type of solution that we can uh offer pretty custom made as well at inverted And we have uh for example that this cryptographic pool would would share a proof of KYC.

Okay. The the individual or the institution has been properly properly KYCed and identified. There is no self-trading here because the outgoing address is actually belonging to a different type of uh KYC individual and and it's unique. Um there is no exposure under threshold price is within a fair range that was set to the parameters of the day etc etc. And all of these proofs are going to the regulator, but the regulator is still not going to be able to see the actual trade and specifically nobody else, right?

Because this is actually a a concrete uh private pool. If the regulator needs to see some more detail details of these of these trades, this can actually be done and made available, right? This is called selective disclosure. Um, and so I think like really the message that that we want to leave you with here today is that really we can encode the rules of compliance into the logic of finance itself when it comes to smart contracts. And this really makes every smart contract a proactive regulator.

Right? In essence, your transactions are not going to be able to be performed unless you meet a certain criteria and that criteria will be defined by the regulators, by the government, etc., etc., or by the institutions themselves. If it's any private uh network internal to the institution, right?

While still ensuring there is the whole set of privacy requirements that that we all want to enable our freedom of movement, of financial movement. So this is really what we believe are the foundations of trust for the future of the financial ecosystem and we hope that you share this view with us and you would be uh you know interested in talking to us at any point. So we'll be here for the next 20 minutes I guess but here's uh our I don't know no contact information sorry about that uh invers.tech and my email is danielinver.te.

So yeah, inverse would be as such here. See it. Any questions? We have minute and a half or so. Okay.

So, thank you very much and thank you for listening.