With the never-ending blockchain-related security breaches and money laundering incidents each year, one of the biggest challenges in the crypto space is making transactions private while remaining compliant with regulations. To tackle this, Inco Network and Circle Research have teamed up to launch the Confidential ERC-20 Framework to enhance privacy and security on public blockchains. 

As outlined in their whitepaper, this new framework transforms standard ERC-20 tokens into confidential versions that mask transaction amounts and balances while meeting regulatory requirements. It’s designed to support a variety of use cases, from payroll to supply chains.

Achieving privacy on public blockchains requires a careful balance. Users want secure, private transactions, but too much privacy can be exploited by bad actors. Regulatory bodies, therefore, require transparency to prevent misuse of funds. For regulated blockchain projects, this means finding ways to protect user privacy while fulfilling anti-money laundering (AML) obligations. It is a top priority for Circle, the issuer of the USD Coin (USDC) stablecoin.

The Confidential ERC-20 Framework addresses this need by allowing transactions to remain private while complying with regulatory standards. The framework performs operations on encrypted data directly within the Ethereum Virtual Machine (EVM), ensuring that sensitive information stays protected. Authorized parties, such as auditors, have selective access to transaction details. This approach provides the necessary oversight for compliance without compromising user privacy.

How the Confidential ERC-20 Framework Works

The Confidential ERC-20 Framework “wraps” ERC-20 tokens in an encrypted layer to hide transaction details like amounts and balances. By using Fully Homomorphic Encryption, data can remain encrypted while still fully operational on the blockchain. This allows users to send and receive tokens without revealing transaction specifics to the public. Developers can assign viewing permissions to specific parties, like regulators, while keeping data private from others. Compliance measures, such as AML protocols and transaction limits, can be directly embedded into the smart contracts to ensure legal standards are met.

The Confidential ERC-20 Framework is suited for sectors where privacy and security are crucial, including payroll processing, peer-to-peer (P2P) payments, and supply chain management. With compliance controls built into its smart contracts, the framework enables enterprises to handle sensitive financial data securely on public blockchains. This makes it particularly valuable for businesses that want to use blockchain for strategic financial transactions but have concerns about transparency.

Thanks to its modular structure, the Confidential ERC-20 Framework allows developers to use it as a building block for privacy-focused DeFi applications without compromising blockchain efficiency or functionality. As blockchain technology continues to gain traction in both traditional finance and new sectors, this framework has the potential to make privacy-protected blockchain applications more accessible for business purposes.

The best part? It’s open-source, and developers are encouraged to incorporate it into their projects to help drive innovation in privacy-centered decentralized finance.

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