Transaction Privacy: The Last Blocker for Massive Open Finance Adoption

Open finance is a new approach to financial services, characterized by decentralization, open access, and innovation. It refers to financial activities and transactions that occur through decentralized infrastructures like blockchain networks. It enables transparency, speed, and interoperability, delivering exceptional efficiency and transforming the way financial systems operate.

The need to bring privacy to open finance

While transparency and reduced information asymmetry can greatly make finance more inclusive and better, not all data can be made public. Sensitive information, such as identities and confidential asset data must remain confidential. The challenge is to balance privacy with the need for transparency. The solution lies in sharing status credentials, such as confirming that a user is KYC-checked or that an asset is ESG-compliant, without exposing detailed data onchain.

Leverage status to ensure data privacy with ERC-3643

ERC-3643 offers a solution for maintaining data privacy by focusing on status verification. Instead of making actual asset or investor data public onchain, only the status credentials, so-called “claims” (e.g., ESG certificate proof, KYC check proof), are shared. Smart contracts can check these claims to confirm status (e.g., whether KYC proof has been obtained). This approach prevents the need for data reconciliation and avoids public exposure of sensitive information.

Addressing Transaction Privacy

Despite these advances, transaction and balance privacy remain concerns when using public blockchains. Large institutions want to keep their balance and transaction data private. Though stablecoin regulations are getting clearer (e.g. European MiCA regulation), the need to hide trade prices to avoid market panic deters institutions from using onchain cash for tokenized securities. This makes atomic settlement unrealistic as the onchain cash leg is not used.

To tackle this, innovative solutions like Fully Homomorphic Encryption (FHE) and Zero-Knowledge Proof (ZKP) have emerged. At Tokeny, we are closely working with privacy solution providers who are building solutions with these cutting-edge technologies to address these issues.

It is just a matter of time before these innovations make transaction privacy a reality in open finance. Stay tuned as we continue to bring you updates on these exciting developments.

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