The Future of Crypto: Embracing Privacy in Wallets

The following is a guest post from Georgi Koreli, CEO & Co-Founder of Hinkal.

For years, crypto wallets have been as clear as glass, showing every single transaction, balance, and interaction on an open ledger. While this was once viewed as a foundational asset of blockchain technology, many now see it as a critical weakness. According to State Street Global Advisors, 62% of institutional investors prefer indirect or regulated exposure to crypto due to concerns about exposing their every action on a public ledger. In an ecosystem that aims to rival traditional finance (TradFi), the inability to conduct business confidentially is a substantial liability.

The recent Bybit hack, which resulted in a loss of $1.5 billion, was reportedly caused by a wallet compromise, highlighting the risks associated with hyper-transparency. Hackers can target high-value accounts, track their activity, and execute precisely aimed attacks. Experts like Vitalik Buterin and EY’s Paul Brody stress that genuine adoption of crypto requires a focus on privacy rather than sole reliance on open ledgers. Despite these warnings, the crypto ecosystem continues to make participants vulnerable, from small investors to large institutions.

Fatal Flaws of Public Wallets

A closer examination of public wallets reveals multiple vulnerabilities:

1. Surveillance: Every token exchange, NFT mint, or balance transfer is publicly visible, allowing observers to deduce a wallet’s balance and spending patterns. This is especially concerning for institutions needing to protect competitive information.

2. Security Risks: Knowledge of a wallet’s holdings enables hackers to identify valuable targets for phishing or social engineering tactics. The Bybit incident exemplifies the danger when malicious entities focus on high-profile addresses. Funds, once laundered through mixers or other means, become nearly impossible to recover. This visibility poses structural risks, such as front-running and extortion, for institutions managing significant treasuries or executing strategic trades.

3. Regulatory Obstacles: Total openness does not equate to satisfying compliance requirements. Traditional compliance relies on regulated gateways, risk assessments, and audited disclosures, rather than merely the perpetual visibility offered by public blockchains. Businesses need confidentiality when negotiating deals or sharing sensitive information with partners. If every transaction is publicly visible, it undermines competitive advantage, making crypto less viable in practical applications.

Private Blockchains: A Mirage of Safety?

In response to transparency issues, some enterprises have adopted private blockchains. These limit participation to a closed group, restricting public access to transaction details. However, this approach contradicts the core principles of decentralization, as a small group can manipulate rules or block transactions against the trustless ethos of crypto.

Additionally, private blockchains can hinder liquidity and composability, essential features of DeFi. This fragmentation disrupts the interconnectedness that enables cross-platform functionality, discouraging developers from building on isolated networks.

Despite initial appeal, private chains may obstruct innovation and collaboration that have driven public blockchain growth. An optimal solution should balance privacy with the open-source principles of public blockchains.

Privacy Wallets with ZK

The road to mainstream adoption lies in privacy wallets utilizing cryptographic techniques like zk-SNARKs and stealth addresses. Zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge) allow one party to confirm a transaction without disclosing its specifics, providing a secure transaction method without revealing all details on the blockchain.

Stealth addresses enhance anonymity by creating single-use addresses for each transaction, shielding the identities of senders and recipients while maintaining the liquidity and composability of public blockchains. Selective disclosure empowers users to provide detailed transaction histories to regulators or auditors while protecting public records. This design harmonizes compliance needs with the importance of privacy.

With these capabilities, institutions can execute large trades without alerting front-runners. Corporations can manage expenses and payroll without revealing sensitive figures. Individual users can enjoy the privacy they expect from traditional banking, all while maintaining a decentralized and active network.

Balancing Privacy, Compliance, and Security

Critics often conflate privacy with anarchy, but this assumption is flawed. Traditional banks do not expose personal account data yet comply with KYC, AML, and other regulations. In a privacy wallet model, authorized agencies can be granted access to decrypt information under proper legal frameworks, allowing user privacy and regulatory compliance to coexist.

It’s vital to recognize that privacy features do not eliminate the necessity for strong cybersecurity. The Bybit hack underscores the need for multisig wallets, hardware-based key storage, and best practices for safeguarding digital assets. Privacy wallets merely reduce incentives for hackers by concealing large balances, adding another level of security alongside existing measures.

Public Wallets Are Done – A Call for a Confidential Future

In conclusion, public wallets are outdated in a landscape where enterprises prioritize confidentiality and users resist total transparency. Notably, figures like Vitalik Buterin and Paul Brody have urged the industry to enhance privacy measures, as mass adoption is unlikely in an environment where every transaction is exposed to hackers and competitors.

The industry must evolve if crypto is to outperform TradFi. Complete transparency is a relic that undermines corporate functionality, jeopardizes personal security, and deters institutional investment.

Privacy wallets offer a compromise retaining the key benefits of public blockchains—accessibility, network effects, and interoperability—while addressing the critical flaw: lack of confidentiality. Introducing stealth addresses, zk-SNARKs, and selective disclosure enables broader utility, mitigates hacking incentives, alleviates institutional fears, and empowers user autonomy.

Thus, it is evident: public wallets no longer align with the trajectory of a rapidly evolving cryptocurrency landscape. Transitioning to privacy-focused wallets is essential for ensuring the viability of digital assets in the financial ecosystem. The missing piece for competing with established financial systems is privacy, and it is imperative not to overlook it.