The European Union (EU) has recently made a groundbreaking move by approving the world's first comprehensive cryptocurrency regulations (MiCA).
These regulations aim to bring clarity and oversight to the crypto industry by introducing licensing requirements for exchanges and wallet providers, as well as mandating the recording of transaction sender and recipient information, regardless of the transaction amount. In light of these developments, questions have arisen about the implications for Dusk and similar crypto companies operating with privacy-focused protocols in the EU with the following conditions as a summary:
- All exchanges and wallet providers must be licensed.
- Names of senders and recipients of transactions must be recorded regardless of the amount.
To learn more about the recently approved EU regulations, check out Ryan King’s blog series on MiCA.
Dusk's Unique Approach
Dusk provides a unique solution that combines privacy and compliance through the use of zero-knowledge cryptography. This means that transactions conducted on the Dusk network are private, while also being auditable by the relevant authorities through provable encryption. Dusk's protocol ensures that transactions are both secure and transparent, striking a balance between privacy and regulatory requirements.
The Inner Workings of Dusk's Protocol
Users select a user key, which is used to encrypt the transaction payload. The user key is then encrypted using the auditor key, ensuring that only the auditor can decrypt it. Through zero-knowledge proofs, users can demonstrate that the auditor key was utilized for encrypting the user key and that the transaction payload adheres to all the rules. This innovative approach combines privacy, digital identity, and encryption to ensure compliance.
Digital Identity and Compliance
Dusk recognizes the importance of digital identity and compliance within the EU's regulatory framework. We are actively working on our European Union Digital Identity (EUDI) ambitions, leveraging Citadel as the underlying technology. This strategic approach positions Dusk well within the regulatory landscape, providing a pathway that is more favorable compared to other crypto companies. Dusk is using privacy, a digital identity solution, a proxied license, and 2 custom-made transaction models to be compliant.
Regulatory Clarity and Real-World Use Cases
The approval of comprehensive cryptocurrency rules by EU legislators brings much-needed regulatory clarity to the crypto industry. For years, Dusk has been preparing for such regulations, and the introduction of these rules aligns with their predictions. Dusk believes that regulatory clarity is crucial for the broader adoption of blockchain technology and the realization of its potential for real-world use cases.
Marginalization of Protocols Lacking Privacy and Auditability
The new regulations are expected to marginalize protocols that lack simultaneous privacy and auditability at the base layer. Other protocols which focus primarily on privacy without built-in auditability, may face challenges in gaining traction within the EU. Public coins will be considered toy protocols, while anonymous ones will be stigmatized, reflecting the views of established corporations and financial institutions.
Provable Encryption and Data Leakage
One concern raised is the potential leakage of provable encryption by authorities. However, it's important to note that what can be leaked is the information of transactors, rather than the encryption itself. The likelihood of such leakage is minimal, as there would be no practical reason for the authorities to do so.
Auditable Transactions and Compliance
Dusk's protocol enables auditable transactions, ensuring that the names of senders and recipients can be retrieved as required by the new regulations. The auditors, such as the Netherlands Authority for the Financial Market (Autoriteit Financiële Markten - AFM) ) and licensing organizations overseeing exchanges, play a crucial role in ensuring compliance. Dusk has designed its infrastructure to meet these regulatory requirements and is well-prepared to navigate the new landscape.
KYC and Digital Identity
While KYC (Know Your Customer) is not implemented at the base layer, Dusk incorporates digital identity solutions as part of its protocol. KYC is a subset of the broader digital identity framework. Users have the option to attach their digital identity to a KYC provider, enabling them to access services that require KYC. However, users can also choose not to undergo KYC and still utilize Dusk for certain services that do not require it.
While some worry that transfers between Dusk wallets might necessitate KYC, the use of Dusk and its decentralized applications (dApps) that regulators don't directly oversee, like a stock exchange, can be done without mandatory KYC. However, accessing services requiring KYC would be restricted.
Dusk presents a compelling value proposition for businesses seeking affordable access to financing opportunities. It serves as a protocol where users from other permissionless networks can invest in Real-World Assets (RWA) as a safe haven during periods of crypto market volatility or bearish trends. Unlike the failed custodial platforms of the past, such as Celsius, Vauld, or BlockFi, Dusk offers a self-custodied approach. It facilitates collateralization by businesses generating tangible revenues, creating tradable assets within the network. By seamlessly enabling transitions between RWAs (essentially securities) and major cryptocurrencies like ETH and BTC, without the need for off/on-ramping, Dusk aims to attract significant assets and entice permissioned walled gardens to adopt its platform on a large scale.
The approval of comprehensive cryptocurrency rules by the EU finance ministers signifies a significant step towards regulatory clarity in the crypto industry. The conversation sheds light on the implications of the EU's comprehensive cryptocurrency rules for Dusk and similar privacy protocols. By combining privacy and auditability, Dusk has positioned itself favorably to comply with these regulations. The adoption of provable encryption, zero-knowledge proofs, and a digital identity solution showcases Dusk's commitment.