In the latest blow to crypto privacy, cryptocurrency exchange FTX is reportedly blocking users who are sending money through an Aztec Protocol, ZK Money, a layer 2 protocol, based on the Ethereum Blockchain. This protocol shields the tokens using a zero knowledge proof cryptography (ZKPC) shield to shield the transaction. These transactions are not in the public information.
According to numerous FTX users, the exchange is warning against the use of Aztec Connect, Aztec Network and zk.money, saying that they are “high-risk” services. This move by FTX is now fuelling the discussion on the greater debate on crypto privacy.
Aztec’s zk.money protocol, which was first introduced in March 2021, can be used to exchange funds privately using direct Ethereum transactions.
The platform achieves this by employing a shield concept similar to a virtual private network. This network transmits the token using ZKPC shield, which allows users to privately connect to decentralised finance (DeFi) services, such as Uniswap, Compound or Aave.
The user has to connect their wallet to ZK Money through Wallet Connect. Then, the user has to choose an alias which will serve as a username. In the event the user forgets this username, the funds will be lost forever. This protocol is based on Layer 2, but users can still send ETH to Layer 1.
“Since most Blockchains are pseudo-anonymous, open, and transparent public ledgers, anyone can run a Blockchain analytics programme on the transactions and see the balances people have. If their addresses touched a system that has information that ties their identity, such as a crypto exchange that does KYC, or a merchant service that has delivered something to their name and house, then it’s fairly easy to associate those addresses and the future movements of coins, and breach the privacy of these users,” says Rajagopal Menon, vice president at WazirX, a crypto exchange.
“By mixing coins, users can obscure the ties between their crypto address and their real world identities, and subsequent transactions. This will allow them to use crypto more privately. Mixers, such as Tornado Cash shot to prominence recently because it is the ‘go to’ mixer for North Korean hackers to launder their ill-gotten wealth and bypass sanctions,” he adds.
On August 8, 2022, the US Department of Treasury sanctioned Tornado Cash, a crypto mixer and the wallet addresses which were associated with the mixer on grounds that North Korea Hackers – Lazarus Group – used the mixer to launder $7.8 million worth of crypto stolen in the August 2, 2022 Nomad Heist.
Says Rahul Tyagi, co-founder, Safe Security: “Majority of the crypto mixers are being used by cyber criminals, nation states, and organised terrorist organisations as a tool for money laundering. When it comes to anonymity, it is being used by lots of individuals and organisations to support whistle blowers and other aid workers, where an individual cannot take the risk of leaving any trace back to him or her. But in majority of instances, the use cases of privacy are limited, when we compare it with activities, such as money laundering and the likewise.”
Rajagopal adds: “Like all technologies, it can be used for good and ‘not so’ good purposes. Just like a TV channel can be used to propagate hate and also to broadcast news; and mobile phones can be used by common people and terrorists alike, the same is the case with crypto mixers.”
