a16z: 6 Misconceptions About Blockchain Privacy
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a16z: 6 Misconceptions About Blockchain Privacy
Blockchain privacy is not a binary choice; innovative technologies can balance security and individual rights.
Navigating Web3 tides with focused insightsAuthors: David Sverdlov & Aiden Slavin
Compiled by: TechFlow
The emergence of new technologies—from the telegraph and telephone to the internet—has always been accompanied by anxieties about the impending demise of privacy. Blockchain technology is no exception, and discussions around blockchain privacy are often clouded by misconceptions: either it brings excessive transparency that threatens personal privacy, or it becomes a haven for criminal activity.
But the real challenge isn't choosing between privacy and security—it's about building tools that support both, at both technical and legal levels. From zero-knowledge proof systems to advanced encryption techniques, privacy-preserving solutions are steadily expanding. Blockchain privacy extends far beyond finance, unlocking applications in identity verification, gaming, artificial intelligence, and more—ultimately benefiting users.
With the formal enactment of U.S. stablecoin legislation, the need for blockchain privacy has become more urgent than ever. Stablecoins offer the potential for cryptocurrency to onboard billions. However, for users to feel comfortable using crypto for everyday payments—from coffee to medical bills—they must be confident their on-chain activities remain private. Now is not the time for confusion, but the time to act and build solutions.
The debate over privacy is nothing new, nor is its answer: only by embracing innovation and rejecting misconceptions can we shape the future of privacy.
Misconception One: The Internet Is the Modern "Privacy Problem" Culprit
Truth: Nearly a century before the internet, communication revolutions at the end of the 19th century helped shape the development of privacy rights in the United States. Entrepreneurs developed technologies capable of transmitting information in unprecedented ways—the first commercial telegraph, telephone, typewriter, microphone, and other media—transforming how information was shared. Historian and professor Sarah Igo notes that privacy conflicts in the U.S. evolved alongside these new communication methods, raising novel questions: Could news outlets use individuals’ names, likenesses, or photographs for commercial purposes? Could law enforcement wiretap phone lines, or use photography and fingerprinting to create permanent records or criminal registries?
Shortly after these technologies emerged, legal scholars began addressing the privacy challenges they posed. In 1890, future Supreme Court Justice Louis D. Brandeis and lawyer Samuel D. Warren published “The Right to Privacy” in the Harvard Law Review. Privacy law then evolved throughout the 20th century via legislation, tort law, and constitutional interpretation. Yet over a century after Brandeis and Warren’s article, the launch of the first widely available commercial web browser, Mosaic, in 1993 triggered an explosion of internet-related privacy concerns.
Misconception Two: The Internet Can Function Without Privacy
Truth: The early internet's lack of privacy protections severely limited its broader adoption. Before the internet, people generally enjoyed higher levels of privacy. As Simon Singh explains in The Code Book, Whitfield Diffie, an early pioneer in cryptography research, observed that at the time the Bill of Rights was adopted, “any two people could have an absolutely private conversation simply by stepping a few meters away from others and ensuring no one was hiding in the bushes—a degree of privacy no one enjoys today.” Similarly, financial transactions conducted with cash or goods provided the anonymity and privacy now missing from most digital transactions.
Advances in cryptographic research alleviated privacy concerns and led to new technologies enabling confidential digital exchanges and data protection. Cryptographers like Diffie anticipated that many users would demand basic privacy for digital activities, prompting them to develop new solutions—specifically, asymmetric public-key cryptography. The encryption tools developed by Diffie and others now form the foundation of e-commerce and data security. These tools also paved the way for confidential digital communications, some of which are now used in blockchain systems.
The development of HyperText Transfer Protocol Secure (HTTPS) exemplifies how privacy tools enabled the internet’s growth. In the early days, users (clients) communicated with web servers via HTTP, which allowed data transmission but had a critical flaw: no encryption. This meant malicious actors could read any sensitive information submitted online. Years later, Netscape introduced HTTPS for its browser, adding encryption to protect sensitive data. As a result, users could securely send credit card details and engage in private communication over the internet.
With encryption tools like HTTPS, internet users became more willing to share personal information—names, birth dates, addresses, Social Security numbers—through online portals. This increased sense of security made digital payments the most common payment method in the U.S. Businesses, in turn, accepted the risks associated with receiving and safeguarding such data.
These behavioral and procedural shifts spurred countless new applications—from instant messaging to online banking and e-commerce. Today, internet activity is integral to the modern economy, enabling unprecedented communication, entertainment, social networking, and other experiences.
Misconception Three: Public Blockchain Transactions Are Anonymous
Truth: Public blockchain transactions are transparently recorded on publicly shared digital ledgers, making them “pseudonymous”, not truly anonymous. This distinction is crucial. Pseudonymity has historical roots in early American history: Benjamin Franklin published early works under the pen name “Silence Dogood” in the New-England Courant, while Alexander Hamilton, John Jay, and James Madison used “Publius” as the author of The Federalist Papers (Hamilton used multiple pseudonyms in his writings).
Blockchain users transact through wallet addresses—unique alphanumeric strings generated algorithmically, rather than using real names or identities. Understanding the difference between pseudonymity and anonymity is key to grasping blockchain transparency: while a wallet address cannot immediately be linked to a specific user, the privacy of its holder is far weaker than commonly assumed—certainly not equivalent to true anonymity. A crypto address functions similarly to a username, email address, phone number, or bank account. Once a user interacts with another party or entity, that counterparty can link the pseudonymous wallet to the individual, exposing their entire transaction history and potentially revealing their identity. For example, if a store accepts cryptocurrency payments, the cashier could see customers’ prior purchases and holdings (at least within the wallet balance on that blockchain network, though skilled users often manage multiple wallets). This is akin to making your credit card history public.
The Bitcoin whitepaper itself warned of this risk, noting that “if the owner of a key is revealed, linking could reveal other transactions belonging to the same owner.” Ethereum co-founder Vitalik Buterin has written extensively about the challenges of “having much of one’s life publicly viewable and analyzable,” proposing solutions like “privacy pools”—using zero-knowledge proofs, users can prove funds are legitimate without disclosing full transaction histories. This is why companies are developing solutions not just to preserve privacy, but to unlock new applications by combining privacy with blockchain’s unique properties.
Misconception Four: Blockchain Privacy Fuels Crime
Truth: Data from U.S. government agencies and blockchain analytics firms show that illegal financial activity involving cryptocurrency remains lower than with fiat currencies and traditional financial systems, and illicit activity constitutes only a small fraction of total blockchain activity (data here; discussed further below). This trend has remained consistent over time. In fact, the proportion of illicit activity on blockchains has decreased as the technology matures.
There’s no denying that illegal activity played a significant role in Bitcoin’s early years. As David Carlisle cites researcher Sarah Meickeljohn's observation: “There was a time when the main Bitcoin address used by Silk Road contained 5% of all existing bitcoins, and the site accounted for a third of Bitcoin transactions in 2012.”
However, the cryptocurrency ecosystem has since implemented effective mechanisms to reduce illicit financial activity, while legitimate usage has grown substantially. According to the latest report from TRM Labs, illicit transaction volume accounted for less than 1% of total crypto transaction volume in 2024 and 2023 (measured by dollar value of hacker thefts and flows to addresses linked to illicit entities). Chainalysis and other blockchain analytics firms have also published similar estimates, including historical data.
Government reports, particularly from the Biden administration’s Treasury Department, further highlight crypto’s relative advantage over off-chain activities regarding illicit financial risks. In fact, recent Treasury reports—including the 2024 National Risk Assessments, the Illicit Finance Risk Assessment on Decentralized Finance, and the Illicit Finance Risk Assessment of Non-Fungible Tokens—all conclude that, by volume and value, most money laundering, terrorist financing, and proliferation financing still occurs through fiat currencies or traditional financial channels.
Moreover, the transparent nature of many blockchains (as discussed in Misconception Three) makes it easier for law enforcement to catch criminals. Because illicit fund flows are visible on public blockchain networks, authorities can trace funds to “off-ramps” (where crypto is converted into cash) and identify blockchain wallet addresses linked to bad actors. Blockchain tracing tools have played a key role in dismantling illegal marketplaces, including Silk Road, Alpha Bay, and BTC-e.
As a result, many criminals recognize the risks of using blockchains to move illicit funds and continue relying on traditional methods. While enhanced blockchain privacy may make it harder for law enforcement to combat on-chain crime in some cases, new cryptographic technologies are emerging that protect privacy while meeting legitimate investigative needs.
Misconception Five: Fighting Illicit Finance and Protecting User Privacy Are Mutually Exclusive
Truth: Modern cryptographic techniques can satisfy both user privacy and regulatory/law enforcement requirements for information and national security. These include zero-knowledge proofs, homomorphic encryption, multi-party computation, and differential privacy. Among these, zero-knowledge proof systems hold particular promise for striking this balance. Such methods can help curb crime and enforce sanctions while preventing mass surveillance and misuse of the blockchain ecosystem for theft or money laundering.
Zero-knowledge proofs are a cryptographic technique allowing one party (the prover) to prove to another (the verifier) that a statement is true, without revealing anything beyond the truth of that statement. For example, to prove someone is a U.S. citizen, a zero-knowledge proof allows verification of citizenship without showing a driver’s license, passport, birth certificate, or other documents. The fact is confirmed while protecting sensitive details—such as address, birth date, or password hints—preserving privacy.
Given these properties, zero-knowledge proofs are among the best tools available for detecting and deterring illicit activity while preserving user privacy. Current research shows privacy-enhancing products and services can reduce risk through several approaches:
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Deposit screening: Prevent deposits from sanctioned individuals or wallets;
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Withdrawal screening: Block withdrawals to sanctioned or illicit-linked addresses;
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Voluntary selective de-anonymization: Allow individuals who believe they were wrongly sanctioned to disclose transaction details to designated parties;
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Involuntary selective de-anonymization: Involve a gateway entity (e.g., a nonprofit or trusted institution) sharing private keys with the government under arrangements where the entity evaluates government requests to de-anonymize wallet addresses.
Under the concept of “privacy pools,” Vitalik Buterin and others advocate using zero-knowledge proofs so users can prove their funds are not from known illicit sources without revealing their full transaction graph. If users can provide such proof when converting crypto to fiat, off-ramps (like exchanges or centralized intermediaries) can reasonably ensure the funds aren’t criminal proceeds, while users retain privacy over their on-chain transaction history.
Although critics have historically questioned the scalability of cryptographic privacy technologies like zero-knowledge proofs, recent advances have made them more practical at scale. By reducing computational overhead, scaling solutions are improving efficiency. Cryptographers, engineers, and entrepreneurs continue refining the scalability and usability of zero-knowledge proofs, making them effective tools for meeting law enforcement needs while protecting individual privacy.
Misconception Six: Blockchain Privacy Only Applies to Financial Transactions
Truth: Privacy-preserving blockchain technology unlocks a wide range of financial and non-financial applications. These capabilities demonstrate how privacy-enhancing blockchain tech can fundamentally expand secure and innovative digital interactions across diverse use cases. Examples include:
Digital Identity: Private transactions enhance digital identity verification, allowing individuals to selectively and verifiably disclose attributes like age or citizenship without exposing unnecessary personal data. In healthcare, digital identity can help patients maintain confidentiality of sensitive information while precisely sharing relevant test results with doctors.
Gaming: Cryptography enables developers to create more engaging gameplay, such as unlocking hidden items or levels after specific actions. Without privacy tools, blockchain-based virtual worlds would be fully transparent, undermining immersion; when players know everything about the digital world, their motivation to explore diminishes.
Artificial Intelligence: Privacy-preserving blockchain tools open new possibilities for AI, enabling encrypted data sharing and model verification without exposing sensitive information.
Finance: In finance, cryptography allows decentralized finance (DeFi) applications to offer more diverse services while maintaining privacy and security. New decentralized exchange designs can leverage encryption to improve market efficiency and fairness.
Voting: In decentralized autonomous organizations (DAOs), privacy in on-chain voting is essential to prevent backlash for supporting unpopular proposals or herd behavior caused by mimicking others’ votes.
These represent just a few obvious applications; as with the evolution of the internet, once privacy features are in place, we expect many more innovative uses to emerge.
The debate over privacy—who controls it, how to protect it, and when to give it up—predates the digital era by at least a century. Every new technology has sparked similar fears at its inception: telegraphs and telephones, cameras and typewriters—all prompted societal debates lasting generations.
The idea that blockchain uniquely threatens privacy, or is especially prone to misuse for illicit purposes, misunderstands both history and technology. Just as encryption and cryptographic protocols made online communication and commerce safe, emerging privacy technologies like zero-knowledge proofs and advanced encryption can provide practical solutions for achieving compliance and combating illicit finance while preserving privacy.
The real question isn’t whether new technologies will reshape privacy, but whether technologists and society can rise to the challenge by implementing new solutions and practices to adapt. Privacy isn’t lost or compromised—it evolves to meet broader societal and practical needs. Like past technological revolutions, the central issue is not resistance, but adaptation.
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