(Kitco News) – Privacy-focused protocols are in the hot seat following last week’s sanctions against the cryptocurrency mixer Tornado Cash by regulators in the U.S., with the Aztec Network being the latest to face an unofficial sanction by cryptocurrency exchanges looking to avoid accepting illicit funds.
Aztec Network is a privacy-focused layer two protocol designed to bring private, scalable transactions to the Ethereum (ETH) network.
On Thursday, users of the cryptocurrency exchange FTX began reporting that the platform had started blocking them from sending funds that interacted with the Aztec protocol in a similar manner as exchanges have been blocking funds and wallets that interacted with Tornado Cash.
Screenshots provided by affected users show that the exchange is warning against the use of Aztec Connect, Aztec Network and zk.money, saying they are “high-risk” services.
Aztec’s zk.money protocol was originally launched in March 2021 and can be used to send and receive funds privately through direct Ethereum transactions. The platform is able to accomplish this by utilizing a shield model similar to a virtual private network which allows users to privately connect with decentralized finance (DeFi) applications like Uniswap or Aave.
Several FTX users have reported that their accounts have been frozen due to transactions made to and from the privacy network, while others have shown that the exchange has begun asking users for the origin of their funds and the purpose of the transaction.
This move by FTX highlights the growing concern that regulators will ramp up their enforcement actions against privacy-related projects, as well as any person or entity that engages with funds that interact with these protocols.
Kitco Crypto reached out to FTX for comments on the matter but did not receive a response by press time.
Following the Tornado Cash sanctions, both centralized and decentralized platforms began blocking addresses that are deemed risky for having interacted with the cryptocurrency mixer, and it now appears that response is spreading to any privacy-related protocol.
The debate about the future of privacy tokens and protocols has been an issue of concern going back years in the crypto community as projects like Monero (XMR) and Zcash (ZEC) have been shunned by many in the ecosystem who wish to avoid drawing the ire of regulators.
These latest developments with Tornado Cash and now Azetec suggest that as the world moves towards the increased adoption of blockchain technology and cryptocurrencies, global regulators intend to discourage the use of privacy protocols to ensure that all exchanges and users comply with KYC/AML guidelines.
Despite the uptick in enforcement actions, many in the industry remain convinced that governments will eventually have to accept privacy protocols, including Aztec CEO Zac Williamson, who recently tweeted, “We are not truly free if we cannot control our own finances. We cannot control our finances without financial privacy.”
“This is the start of a long, grinding battle of attrition. I am confident regulators will move incrementally towards a future where user privacy is protected and celebrated, after exhausting all possible alternatives,” Williamson said.
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