The numbers are staggering, and the implications equally terrifying: last month’s revelation that over 16 billion login credentials spanning Apple, Google, Facebook, and countless other platforms in multiple breaches isn’t just a security failure. It’s an inevitable consequence of a regulatory framework that prioritizes data collection over data protection.
Ironically, our current Know Your Customer (KYC) laws, which are designed to protect consumers and prevent financial crimes, actually put millions at greater risk by requiring certain entities to collect and retain sensitive data. Every time a passport photo, Social Security number, and copies of other personal documents are collected to comply with KYC laws, they create “honeypots” – centralized treasure troves of valuable personal data irresistible to cybercriminals.
Not only do KYC laws put millions at personal risk and create a national security risk of being hacked by other governments, but they are also ineffective. The United Nations (UN) and Financial Action Task Force (FATF) estimate that less than one percent of global illicit finance is stopped. Let that sink in.
According to a study by LexisNexis (2023), the worldwide financial cost of compliance for financial institutions is nearly US$250 billion. KYC laws impose a massive cost burden on top of these risks for an almost non-existent benefit in stopping illicit finance. When regulations require companies to amass personal data, we shouldn’t be surprised when that data inevitably becomes weaponized against the very people it was meant to protect. The solution to protect individuals’ data while ensuring compliance, borne out of the crypto world, already exists: zero-knowledge proofs.
The Compliance Paradox
Traditional KYC compliance creates a dangerous paradox: the more thoroughly a company (or even a government!) follows the rules, the more attractive a target they become to hackers.
Recent breaches at major platforms like Coinbase, which saw almost 70,000 users affected by an internal threat with estimated losses reaching US$400 million, show that even the most security-conscious organizations continue to remain vulnerable when they lawfully maintain vast databases of sensitive personal information.
The problem isn’t that companies are careless with data; the problem is our current regulatory frameworks mandate centralized data vaults, which by their very nature present systemic personal and national security risks. They become a single point of failure that can expose millions of individuals with one successful attack.
This approach made sense in an analog era when verification required physical inspection of documents, but it’s outdated and actively harmful in our digital age. We’re using 20th-century compliance methods to address 21st-century problems. The results have been a failure.
Zero-Knowledge Provides Proof Without Exposure
Fortunately, innovations in cryptography offer a path forward that doesn’t require companies to choose between compliance and privacy. Zero-knowledge proofs (ZKPs) represent a fundamental shift in how we think about identity verification. With zero-knowledge technology, users can verify their identity without revealing any personal information and get verified in seconds rather than days.
It’s an elegantly simple concept: instead of showing your driver’s license to prove your age, you can provide cryptographic proof of your age without revealing your birth date, name, or any other identifying information. The verifier gets the proof they need for compliance, and your data never leaves your control.
This innovation isn’t theoretical, it’s here, now. Projects like ZKPassport demonstrate how electronic passports can generate ZKPs of identity, nationality, and age without exposing the underlying data, while still complying with security and privacy regulations.
In contrast to other solutions, ZKPassport is fully open-source, not proprietary or captured by Big Tech (like Google); no information leaves a user’s device; cryptography can be easily upgraded using a new programming language called Noir; it’s interoperable between Web2 and Web3; and no personal biometric data scan is required.
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A Regulatory Reckoning
The trillion-dollar question then becomes whether our regulatory institutions can adapt quickly enough to prevent the next catastrophic data breach that will fuel unprecedented levels of identity theft and financial fraud. We need immediate legislative changes globally, recognizing the privacy-preserving potential of ZKP technology and focusing on verification outcomes, not mandating data collection.
Instead of requiring the storing of sensitive information, laws should permit cryptographic proofs that achieve the same compliance objectives without creating data honeypots, protecting national and personal security.
The European Union’s approach to privacy regulation with the General Data Protection Regulation (GDPR) shows promise, but even GDPR doesn’t go far enough in incentivizing privacy-preserving methods. We need regulatory frameworks that explicitly favor technologies and methods that minimize data collection while maintaining security standards.
Privacy- and Compliance-First Future
As digital identity continues to become central to everything we do, the stakes of getting this right are enormous and the implications extend far. The technology exists today to build a world where proving who you are doesn’t require surrendering your privacy. ZKPs can enable age verification for social platforms, income verification for home loans, and citizenship verification for voting, all without centralized databases we know are always vulnerable to attack.
But technology alone isn’t enough; we need policymakers who understand that privacy and compliance aren’t opposing forces. Rather, they’re complementary goals that can be achieved simultaneously with the right technological and regulatory framework.
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The Crypto Path Forward
Our inability to stop data leaks should continue to be a wake-up call whose urgency grows with each new breach revelation. Every day we delay implementing privacy-preserving, open-source and decentralized verification systems is another day towards a new breach, which leads to a personal security and national security risk.
Of all the industries adopting KYC requirements, the financial sector has been the most aggressive and can lead the charge toward zero-knowledge compliance solutions. Regulators must modernize frameworks to explicitly allow for and incentivize zero-knowledge verification methods.
Tech companies must continue to invest in privacy-preserving systems now, rather than waiting for regulations to catch up. The current system just doesn’t work. We can either continue to build ever-growing data honeypots that are ripe for hacking, or embrace that compliance and privacy can work hand-in-hand to prioritize data protection over data collection, and support a more privacy-conscious future.
We need to move from KYC to ZKP, ASAP.
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Disclaimer: This article is an opinion piece. The content may include the personal opinion of the author and is subject to market conditions. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.