Circle and Inco Unveil Confidential ERC-20 Standard To Bolster Privacy

Circle, the company behind the USDC stablecoin, is working on a modified version of the ERC-20 token standard offering improved privacy for users.

On Oct. 28, Circle Research and Inco Network, an Ethereum-based confidentiality layer, published a whitepaper introducing the Confidential ERC-20 Framework.

The framework comprises a wrapped version of ERC-20 tokens, the most popular fungible token standard, that conceals account balances and transaction values while maintaining regulatory compliance features.

Circle distinguishes between on-chain anonymity — which hides the wallet address of transaction counterparties, and on-chain confidentiality — which conceals the account balances and transaction values of counterparties. As such, the standard offers financial privacy for users, but does not obfuscate which wallets Confidential ERC-20 tokens are transferred between.

“Though anonymity typically provides stronger privacy assumptions than confidentiality, it may also pose greater threats from a risk management standpoint, because bad actors may be able to use anonymity to obfuscate illicit activity,” Circle said. “Confidentiality is sufficient for many use cases in the financial system: employee payroll, supply chain vendor payments… or even P2P payments.”

Confidential ERC-20 tokens support delegated viewing, allowing users to grant permissions for select entities to view account and transfer balances, such as regulators, auditors, and law enforcement. The standard also supports programmatic transfer rules, meaning asset issuers can enforce KYC and other whitelisting measures to ensure regulatory compliance.

The token standard also retains the composability of ERC-20, allowing assets to be integrated into various Ethereum Virtual Machine (EVM)-compatible applications.

The Confidential ERC-20 standard leverages Fully Homomorphic Encryption (FHE), an encryption technique that does not require decryption for FHE data to be computationally processed. FHE underpins Inco Network’s privacy layer.

While the whitepaper attracted praise from developers and investors within the web3 ecosystem, some staunch privacy advocates are less convinced.

“Circle's ‘confidential ERC20’ has no privacy,” said Chaserxy, an X user. “It's a pretense of encrypted amounts, where the token contract admin and authorities have a backdoor to seeing everything.”