The Privacy Compliance Breakthrough Battle for Blockchain Enterprises: When Decentralization Meets Global Data Protection Regulations

Original author: May Pang, Chief Compliance Officer@OORT

Introduction

When DeFi protocols encounter the "right to be forgotten" under GDPR, and when NFT platforms face the "right to opt out" under CCPA, the blockchain industry is experiencing a fierce collision between decentralized ideals and real-world regulations. According to a report by Chainalysis, fines imposed on global blockchain companies due to privacy compliance issues increased by 240% year-on-year in 2023. This article will deconstruct how blockchain projects can build compliance competitiveness in the Web3 era.

1. Core Similarities and Differences of Global Privacy Regulations

With the increasing attention to data privacy issues, the CCPA in California, the PIPL in China, and the GDPR in the European Union have become the three representative regulations. While all three are designed to protect personal data, their focus and specific requirements differ significantly.

In terms of scope, the CCPA only targets California residents, while the PIPL and GDPR have extraterritorial effect, covering scenarios where the data of citizens of their country is processed abroad. In terms of core rights, the GDPR is the most comprehensive, giving users the "right to be forgotten" and "right to data portability"; PIPL emphasizes full control over data processing; The CCPA focuses on the right to know and the right to opt-out. In cross-border data transfer, PIPL has the most stringent requirements and needs to pass security assessment or certification; GDPR relies on standardized tools; The CCPA has no special restrictions.

The differences in compliance measures are also worth noting: both PIPL and GDPR require data localization or cross-border assessments, while CCPA places more emphasis on transparency (such as providing a "Do Not Sell" link). In terms of penalties, GDPR and PIPL calculate fines based on revenue, which has a stronger deterrent effect.

2. Conflicts Between Blockchain Characteristics and Privacy Regulations and Solutions to Break Through

1. The Paradox of Immutability and the Right to Deletion

The core feature of blockchain—immutability—makes it the cornerstone of trust machines. However, this feature directly conflicts with the "Right to Erasure" in the three major privacy regulations. When users request data deletion, the blockchain's "append-only" ledger characteristic leads to compliance dilemmas. How can we balance data immutability with legal deletion rights? Below are explorations of technical solutions.

1.1 User Data Sovereignty Network: Ceramic Protocol

The core idea is to decouple sensitive data from the blockchain, only retaining the hash, while the original data is managed by the user independently. Through the Ceramic protocol, data is stored in decentralized storage networks (such as IPFS), with the user controlling the private key. The blockchain only saves the data fingerprint (hash), and access becomes invalid when the private key is destroyed upon deletion. Successful cases include: Mask Network users storing encrypted social data (such as posts, follow lists) through Ceramic, and IDX users storing verifiable credentials (such as KYC proof, social account bindings) through Ceramic stream.

1.2 Logical Deletion: Arweave+ZK-Rollup

Real-life cases such as the delisting of infringing NFTs on Immutable X illustrate the core idea of physically retaining data while achieving "logical invisibility" through zero-knowledge proofs (ZKP). In practical implementation, Arweave can be used for permanent storage to write data into an immutable layer, and then through a ZK-Rollup compliance layer, validators can reject transactions containing that data after the content is delisted.

1.3 Consortium Chain Dynamic Permissions: Hyperledger Fabric Private Data Sets

The core idea is to control data visibility through node permissions in a permissioned blockchain. For example, in an enterprise consortium chain, this is achieved by setting up Private Data Collections, allowing sensitive data to be visible only to authorized nodes, and enabling dynamic deletion of data, such as allowing consortium members to vote to remove non-compliant data (e.g., deleting incorrect medical records in a healthcare chain).

1.4 Programmable Privacy Layer: Aleo's Opt-Out Mechanism

The core idea is to support "selective disclosure" with regulatory intervention while protecting privacy. User data is encrypted on-chain through zero-knowledge proofs (zkSNARK), and when necessary, provides a viewing key (View Key) to regulatory authorities or executes an Opt-Out deletion (such as hiding transaction history). Aleo provides compliant privacy trading solutions for financial institutions based on this.

2. The Balancing Act Between Anonymization and KYC

The three major global privacy regulations impose strict requirements for the anonymization of personal information processing, while anti-money laundering (AML) regulations mandate KYC verification. How can the blockchain industry find a balance amidst this contradiction? Here are three innovative solutions.

2.1 ENS + Decentralized Identity (DID): Controllable Identity Disclosure

The core idea is to use Ethereum Name Service (ENS) as a readable identity identifier, rather than directly exposing real names, combined with decentralized identity protocols (such as Ceramic IDX and Spruce DID), allowing users to choose which information to disclose. Uniswap Wallet uses this technology to support ENS aliases, reducing the risk of address exposure.

2.2 Polygon ID: Zero Knowledge Proof (ZKP) for Minimizing KYC

The technology uses zero-knowledge proofs to allow users to prove their eligibility (such as "over 18 years old") without disclosing specific age or ID number, and does not store original identity data, only the proof. Once verified, transactions can use anonymous addresses (such as zkRollup accounts). Users can also revoke the proof at any time to stop data sharing. This operation can comply with the minimum necessary principle of the three major regulatory compliance requirements, collecting only the necessary information.

2.3 Circle TRUST Framework: A Trade-off Between Stablecoin Compliance and Privacy

TRUST (Travel Rule Universal Solution Technology) is a compliance protocol proposed by Circle (USDC issuer) that allows KYC data to be securely shared between VASPs without being exposed to the public. End-to-end encryption and access control ensure that only compliant authorities can see traders' identities. The framework is compatible with the FATF travel rules, meeting regulatory requirements while protecting user privacy. At the same time, the framework is a non-custodial architecture, that is, user data is not controlled by a single centralized authority, reducing the risk of leakage. The TRUST framework is also auditable, guaranteeing on-demand access to regulators that are not traceable to the average user.

3. Smart Contracts and Data Subject Rights

The three major regulations emphasize that individuals, as data subjects, have the right to decide about their own information. However, many current blockchain projects, including the operation of DAOs, still cannot escape neutral governance. For example, Uniswap still relies on centralized front-ends or foundation decisions, which leads to the undermining of users' data rights. How can smart contracts truly respect the rights of data subjects? Here are two potential solutions to consider:

3.1: Aave Introduces Data Processing Impact Assessment (DPIA) Mechanism for DAO Voting

DPIA (Data Protection Impact Assessment) is a mandatory assessment process required by GDPR that requires companies to evaluate privacy impacts before processing high-risk data. The on-chain DPIA proposal mandates that any changes involving user data (such as the addition of a KYC module or log storage policy) must be voted on by DAO members, and the proposal must include a privacy impact analysis (for example, "does this change increase the risk of data breaches?"). Additionally, compliant smart contracts must be deployed to manage user authorization through verifiable credentials (VCs) and establish a penalty mechanism. If the DAO approves a proposal that violates GDPR, the governance tokens it has staked (such as AAVE) may be forfeited. DAOs like Aave have incorporated this into on-chain governance to ensure transparency in their data decisions.

3.2: Filecoin Implements Automated Data Lifecycle Management

The GDPR's principle of storage limitation requires that data be retained only as necessary, and Filecoin, as a decentralized storage network, can achieve automatic expiration deletion through smart contracts, avoiding permanent storage violations. When users upload data, they set a storage duration (e.g., automatically deleted after 1 year), and Filecoin nodes execute the cleanup after expiration. Storage providers do not need to disclose the data content; they only need to prove "deleted as agreed" (e.g., by submitting a deletion proof via zk-SNARK). If an NFT platform uses Filecoin to store artistic metadata, it can embed automatic delisting logic (e.g., triggering deletion after copyright expiration). A case reference is the automatic revocation of data usage rights in Ocean Protocol.

4. PIPL Cross-Border Data Transfer Breakthrough

For Chinese companies, with the implementation of the Personal Information Protection Law (PIPL) in November 2021, the regulatory environment for cross-border data flows has undergone fundamental changes. Article 38 of the PIPL clearly stipulates that the export of personal information must go through a compliance path such as security assessment, standard contract or certification. This regulation presents a unique challenge for the blockchain industry – how to meet the compliance requirements of cross-border data transfers while maintaining the characteristics of distributed ledgers? The following is the technological innovation and compliance wisdom of Chinese blockchain companies in the PIPL era in recent years, which can be used as a reference for other projects.

4.1 The "Regulatory Sandbox" Model of Chang'an Chain: Innovation in Main Chain-Sub Chain Architecture

The Chang'an Chain, as a domestically controllable blockchain underlying technology platform in China, innovatively proposes a "domestic main chain + overseas sub-chain" dual-layer architecture design, providing a technical implementation path for PIPL compliance. Its domestic main chain stores raw data, while the overseas sub-chain only retains data hash values and necessary transaction information. By deploying a cross-border transmission gateway certified by the Cyberspace Administration, it achieves refined control over data flow, and sets up regulatory nodes with special permissions in the sub-chain to meet auditing requirements.

4.2 Oasis Network Privacy Computing Framework: The First Overseas Blockchain to Pass the Security Assessment by the Cyberspace Administration

In 2023, Oasis Network became the first overseas blockchain project to pass the security assessment by the Chinese Cyberspace Administration, with its privacy computing framework providing innovative solutions for cross-border data flow. It employs TEE (Trusted Execution Environment) technology to achieve "data available but not visible," and adds noise protection for individual privacy during the data analysis phase, setting permission blockchain through access control (RBAC) mechanisms. Ultimately, it meets PIPL requirements through a dual mechanism of "data desensitization + access control."

4.3. Ant Chain Trusple Platform: Best Practices for Standard Contract Filing

The international trade platform Trusple of Ant Chain has created a benchmark case of PIPL compliance by innovatively combining smart contracts with standard contracts. Its smart contract filing encodes the standard contract terms into executable smart contracts, verifies cross-border transmission conditions in real-time through oracles, achieves automated compliance, and records all transmission on-chain for proof, meeting regulatory audit requirements.

Conclusion

The integration of blockchain and privacy regulations is by no means a zero-sum game. As Ethereum founder Vitalik Buterin said: "The next generation of privacy protocols must embed compliance genes." Projects that transform regulatory requirements into technical features are defining a new paradigm for the Web 3 era—safeguarding the spirit of decentralization while building a sustainable compliance moat.