A Privacy-Preserving KYC-Compliant Identity Scheme for Accounts on All Public Blockchains

Abstract

Cryptocurrencies have the potential to enable socioeconomic growth throughout the world by offering easier access to capital and financial services. However, many virtual asset service providers (VASPs) that offer cryptocurrency services lack identity management and can be accessed anonymously, which has led to their services being exploited by criminal activities such as money laundering and illegal foreign exchange. Such crimes have a negative impact on socioeconomic sustainability. Building identity systems on blockchains can help VASPs improve their identity management to combat cryptocurrency-based crimes so VASPs can better serve the social economy and achieve their sustainability goals. However, existing solutions have privacy problems because the identity provider can associate users’ identities with their wallet accounts. In addition, there is currently no solution that can support all public blockchains unconditionally, as current solutions can only support EVM-compliant blockchains or require additional work to support new blockchains. This article proposes a KYC (know your customer)-compliant identity scheme based on Ethereum using Merkle trees and smart contracts. The identity and wallet accounts are linked by the user rather than the KYC provider so, in general, no one but the user knows the association between the wallet accounts and the identity, which protects privacy. For suspicious accounts, supervisors can trace their identities and thus achieve supervision. In addition, the scheme supports identifying accounts on all public blockchains by using Merkle trees and smart contracts to bind accounts on multiple blockchains to one identity and no extra work is required. Moreover, the scheme supports users to prove that their attributes meet the requirements of VASPs by adopting the BBS+ signature and the Sigma protocol.

Digital Authentication System in Avatar Using DID and SBT

“…Furthermore, it manages user authentication off-chain and only later manages it through smart contracts in a whitelist manner. Additionally, the KYC Privacy-Preserving Identity Scheme is discussed by [46]; KYC processes handled by VASPs using non-fungible tokens for identity verification are discussed. These tokens are associated with approved institutions and utilize BBS+ signatures for ZKP.…”

“…According to the definition of identity [46] in the blockchain, identity is categorized into transaction identity, based on wallet account information, persona identity, rooted in personal characteristics, credential identity, based on social behavior or asset ownership, reputation identity, established from reputation, and data identity, built upon actual data.…”

Cryptocurrency and financial crimes: A bibliometric analysis and future research agenda

“…They investigated how technological innovations shape and guide customer due diligence (CDD) in the anti-money laundering (AML) discipline. Sun et al (2022) and Sabuj et al(2024) proposed a KYC (know your customer) compliant identity scheme. The scheme allows only the users to know their identity and wallet accounts, thus providing privacy and confidentiality, while supervisors can trace the identities of suspicious accounts.…”

Blockchain Maturity of Ghanaian Financial Institutions and Their Readiness to Adopt Distributed Ledger for KYC Processes

“…Another very essential disruption of blockchain has been in the area of smart contracts. Smart contracts are a collection of computerized transactional protocols that facilitate, verify and enforce the negotiation or performance of a contract by automatically executing the terms of the contract and hence reducing the transaction costs associated with conventional contracting and also hopefully providing better assurance than the conventional paper-based contract management (Sun et al, 2022;Yu et al, 2017). It is the translation of contractual clauses into code that is embedded into hardware or software and can be self-enforced when executed to minimize the need for trusted intermediaries between transacting parties (Christidis & Devetsikiotis, 2016).…”