Privacy Pools Launch on Ethereum with Buterin’s Backing, Paving the Way for Legal On-Chain Privacy

0xbow has launched Privacy Pools, a new blockchain tool designed to offer on-chain privacy for Ethereum users while ensuring compliance with legal requirements. The tool allows users to protect their transaction history through the use of zero-knowledge proofs, ensuring privacy for ERC-20 token transfers without involving illicit funds.

The mainnet launch, announced on March 31, aims to solve one of the major issues faced by previous privacy tools: preventing the entry of stolen or illicit funds into the system. Unlike earlier privacy mixers, Privacy Pools screens deposits to ensure compliance, and deposits linked to malicious actors are flagged and removed. If a user’s deposit does not pass the screening process, they can use a “ragequit” function to withdraw their funds back to their original wallet, ensuring Privacy Pools is a non-custodial solution.

Vitalik Buterin, co-founder of Ethereum, publicly supported the project and even made one of the first ETH deposits into the pool after its mainnet launch. He is also one of the co-authors of the research paper behind Privacy Pools, emphasizing the project’s importance in maintaining privacy while adhering to regulatory standards.

The system operates through Association Sets, which group transactions together, verifying that they are not connected to hackers or other malicious actors. This design allows for a balance between maintaining privacy and ensuring the legal and ethical integrity of the system. If a deposit is flagged later, it can be removed without impacting other users.

As of the latest update, Privacy Pools has processed over 21 ETH from 69 deposits, with an initial deposit cap set at 1 ETH. The cap is expected to rise as the system undergoes further testing.

The launch of Privacy Pools comes at a time when privacy tools have faced significant regulatory challenges, particularly around privacy coins like Monero and Zcash, which have been criticized for enabling illicit activities. A high-profile case was the sanctioning of Tornado Cash by the U.S. Treasury Department for allegedly facilitating illegal transactions. However, a U.S. appeals court ruled in November 2024 that the sanctions on Tornado Cash were unlawful, a decision that questioned whether decentralized protocols could be legally penalized for facilitating privacy.

Given the increasing scrutiny over privacy tools, it remains to be seen whether 0xbow’s Privacy Pools will meet global regulatory requirements, especially as more countries impose tighter restrictions on privacy-focused technologies. Nonetheless, the project represents an important step forward in providing both legal on-chain privacy and security in a decentralized finance ecosystem.