Financial compliance has always balanced a delicate line: regulators need enough visibility to keep bad actors out, but users want their financial lives to remain private just to make a payment or transaction. In 2025, this tension is more acute than ever. We have stricter anti-money laundering rules, broader data protection regimes, more cross-border activity and, at the same time, better privacy technology than ever before.
The good news is that we no longer have to sacrifice privacy to ensure compliance. Zero-knowledge proofs (ZKP) provide a solution to what we call privacy paradox: regulators need assurance that the rules are being followed, but full disclosure of identities and transaction details creates security, legal and data protection risks. ZKPs allow us to move from the “show me the data” model to “show me proof,” allowing companies to demonstrate compliance without revealing the underlying information.
This approach is not intended to obfuscate regulatory oversight. Instead, it modernizes the compliance toolset so that regulated businesses can demonstrate that they are meeting their legal obligations (sanctions screening controls, KYC obligations, segregation of customer assets, capital controls) without transferring or exposing the underlying data. ZKPs could be better for users and, in the long run, for regulatory compliance, because the evidence is verifiable and tamper-proof.
What Zero Knowledge Really Does
A zero-knowledge proof is a cryptographic way of saying, “I can prove to you that I followed rule X, but I won’t show you the sensitive information usually required to prove it.” » In finance, “rule X” can be very concrete: “this portfolio has been reviewed against the current sanctions list”; “This user holds a valid KYC ID from a trusted issuer”; “This exchange holds clients’ assets at 1:1 and they match liabilities”; “this transaction is below (or within) an allowed range,” and so on.
Today, the law may require us to report large data sets to specific regulators. We comply with applicable data protection laws, but this also increases the risk of cybersecurity breaches and misuse. A ZK-based approach proves the result, not all the inputs. If a regulator needs to go further, a process can be designed for the selective disclosure of particular data required (key viewing, time-limited access and full audit logs, granted through due process if necessary), such as a portal or authorized regulatory window.
Why it matters now
Three trends are converging.
In the EU, supervisors are making anti-money laundering (AML) controls more granular, while GDPR and other privacy regimes emphasize data minimization and purpose limitation. These can be complementary rather than opposing: compliance should provide the same, or even better, assurance with less routine exposure of personal data. This goal can be achieved by using privacy-preserving reporting techniques.
Second, digital identity frameworks (such as those envisioned under eIDAS 2.0) are moving closer to reality. They rely on the same basic elements as ZK: verifiable credentials, selective disclosure and cryptographic attestations. This makes it much more realistic to issue portable “I have passed KYC” or “I am not sanctioned” credentials that can be proven and not retrieved across multiple services.
Third, supervisors are exploring privacy-enhancing technologies, including evidence-verification models.
What an evidence-based compliance stack could look like
We already have concrete examples. ZK-enhanced proof of reserves is the best known: an exchange proves that it has the assets necessary to meet customer obligations without revealing individual balances. This is a zero knowledge guarantee.
You can do the same for sanction control. Instead of sending the full identity every time, a wallet presents proof that it was verified against the last list at a specific time. The regulator, or a regulated VASP on the other side, runs a verification node to confirm that the proof is valid and up to date. Importantly, “verification nodes” are a policy proposal that functions as a surveillance infrastructure allowing supervisors to validate evidence without collecting massive data.
You can also do this for segregation: a custodian proves that client assets are not mixed with house funds via range or sum proof, without publishing the entire ledger. You can even integrate this into smart contracts: transactions only execute if the proof is successful. This is “programmable compliance”: rules applied at the time of the transaction in “real time”, rather than afterwards.
For regulators, the key shift is moving from collecting raw data to verifying cryptographic evidence. They still benefit from assurance, auditability and traceability when there is a legal basis to unmask. But they are not required to hold or process significant amounts of personal data by default, reducing both operational and legal risks.
Answer key questions
Regulators are already beginning to adopt targeted ZK pilots, ranging from verifiable reserve proofs to travel rule compliance that validate user attributes without exposing full data sets. As these primitives mature, they naturally evolve into market integrity checks, allowing companies to demonstrate compliance with concentration and exposure limits through scope and sum evidence without revealing their underlying positions.
Importantly, ZK is not synonymous with opacity; well-architected systems use selective disclosure via visualization or multi-part keys. This ensures that law enforcement access is limited, provable, and subject to due process rather than remaining universal and silent.
What regulators might require
To work across borders, we need standards: standard types of evidence (e.g. “not on sanctions list X on date Y”), standard identification formats, and standard verification logic that can be inspected. This way you avoid each exchange, wallet or bank creating its own version and creating unnecessary monitoring complexity for supervisors.
Concretely, regulators can benefit from six things:
- Data results (tell me what you have proven, not everything you have);
- Evidence of less information (prove only what is necessary for this obligation);
- Programmable checks (applied at the time of the transaction, if applicable);
- Strong data availability and output mechanisms (users can still confirm their balances and withdraw);
- Verifiable Verifier Logic (inspections, test vectors, audit logs);
- No widespread backdoors (disclosure only within legal, narrow and registered processes).
Binance is a global exchange that already uses ZKP to demonstrate its reserves. Our Proof of Reserves (POR) system uses a Merkle tree – a cryptographic structure that condenses numerous account entries into a single “fingerprint” – along with zero-knowledge proofs to demonstrate that client assets are fully collateralized without revealing individual balances. With each POR update, users can confirm that their balance is included in the tree, while ZKPs ensure that overall totals are correct and no negative or false balances are included. The result is an independent, privacy-respecting verification of reserves, which builds trust without compromising personal data.
But it’s bigger than just one company. If we can do this, we can make financial compliance more accurate, more privacy-friendly, and easier to supervise.
This will require collaboration. Regulators will need to develop standards of proof that they accept; industry will need to align with and integrate standards of evidence, and standards bodies will ensure that standards of evidence are interoperable across borders.
What success looks like
Success is when a user can prove their legitimacy without oversharing; a bank, VASP or exchange can comply with AML/Travel Rule obligations with smaller data disclosures; a regulator can run a verification node and obtain assurance in real time; and bad actors can be exposed under clear, narrow and lawful conditions.
In short, insurance with less disclosure. As cyber risks increase, privacy laws evolve, and cross-border digital finance expands, moving from routine mass data collection to verifiable evidence is a pragmatic upgrade in surveillance practices.
References to EU privacy legislation in this article reflect the framework in force as of November 2025; The Commission’s digital omnibus proposals remain subject to change in the ordinary legislative process.
