Private Stablecoin with KYC and Deposit/Withdraw¶

The code for this tutorial can be found in example/private-stablecoin.

This example demonstrates a private stablecoin with KYC compliance that exists as both a public ERC20 token and a private Zeto token, showcasing deposit/withdraw functionality using Paladin's Zeto domain. It illustrates how financial institutions can manage regulatory compliance while enabling users to seamlessly move between public and private representations of the same asset for enhanced privacy preservation.

Running the example¶

Follow the Getting Started instructions to set up a Paladin environment, and then follow the example README to run the code.

Key Features¶

This tutorial demonstrates:

Dual Token System – Same asset exists as both public ERC20 and private Zeto tokens
KYC Compliance – Financial institution manages client registration for regulatory compliance
Seamless Deposit – Convert public ERC20 tokens to private Zeto tokens
Private Transfers – Zero-knowledge proof-based transfers with KYC verification and complete privacy
Seamless Withdraw – Convert private Zeto tokens back to public ERC20 tokens, optionally to a different account owned by the depositor
Flexible Liquidity – Users can choose between public transparency and private anonymity while maintaining compliance

Scenario Overview¶

Financial Institution (Node 1) – Deploys contracts, manages KYC registration, and issues stablecoins
Client A (Node 2) – Enterprise client receiving and transacting with stablecoins
Client B (Node 3) – Enterprise client receiving private transfers and withdrawing tokens

The financial institution manages the entire lifecycle from contract deployment through KYC registration to token issuance and oversight.

Step-by-Step Walkthrough¶

1. Deploy Contract Infrastructure¶

The example begins by deploying both the public ERC20 and private Zeto contracts:

// Deploy private stablecoin using Zeto_AnonNullifierKyc
const zetoFactory = new ZetoFactory(paladin1, "zeto");
const privateStablecoin = await zetoFactory.newZeto(financialInstitution, {
  tokenName: "Zeto_AnonNullifierKyc",
});

// Deploy public ERC20 stablecoin
const publicStablecoinAddress = await deployERC20(paladin1, financialInstitution);

// Connect the ERC20 to the Zeto contract for deposit/withdraw
await privateStablecoin.setERC20(financialInstitution, {
  erc20: publicStablecoinAddress,
});

The Zeto_AnonNullifierKyc contract provides:

Anonymous transfers with zero-knowledge proofs
Nullifier protection against double-spending
KYC compliance verification for all participants
Deposit/withdraw functionality for ERC20 integration

2. KYC Registration Process¶

Before any stablecoin operations, the financial institution registers all participants for KYC compliance:

// Financial institution registers itself
const bankPublicKey = await getBabyjubPublicKey(financialInstitution);
let kycTxId = await paladin1.sendTransaction({
  type: TransactionType.PUBLIC,
  from: financialInstitution.lookup,
  to: privateStablecoin.address,
  data: {
    publicKey: bankPublicKey,
    data: "0x", // KYC compliance data could go here
  },
  function: "register",
  abi: kycAbi.abi,
});

// Register Client A and Client B similarly...

KYC Benefits:

Regulatory compliance – All participants verified before token operations
Privacy-preserving verification – Uses BabyJubJub keys compatible with zero-knowledge proofs
Financial institution control – Centralized KYC management by the issuing institution
Cryptographic identity binding – Links identity verification to cryptographic keys

3. Mint Public Stablecoins¶

The financial institution mints public ERC20 stablecoins to clients:

// Mint public stablecoins to Client A
await mintERC20(paladin1, financialInstitution, clientA, publicStablecoinAddress, 100000);

// Mint public stablecoins to Client B  
await mintERC20(paladin1, financialInstitution, clientB, publicStablecoinAddress, 50000);

Public Token Benefits:

Transparent balances – All ERC20 balances are publicly visible
Standard compatibility – Works with existing DeFi protocols
Regulatory compliance – Full transaction transparency for oversight
Familiar interface – Standard ERC20 functionality

4. Deposit: Public to Private¶

Client A decides to deposit some public tokens for privacy:

// Client A approves Zeto contract to spend their ERC20 tokens
await approveERC20(
  paladin2,
  clientA,
  privateStablecoin.address,
  publicStablecoinAddress,
  75000
);

// Client A deposits ERC20 tokens to get private Zeto tokens
const depositReceipt = await privateStablecoin.using(paladin2).deposit(clientA, {
  amount: 75000,
});

Privacy Benefits:

Token amounts become private – No longer visible on public ledger
Identity protection – Client's balance and activity become anonymous
Zero-knowledge security – Cryptographic proofs ensure validity with KYC compliance
Reversible process – Can withdraw back to public tokens anytime

5. Private Transfers with KYC Verification¶

Client A makes a private transfer to Client B, with automatic KYC verification:

const transferReceipt = await privateStablecoin
  .using(paladin2)
  .transfer(clientA, {
    transfers: [
      {
        to: clientB,
        amount: 25000, // Transfer 25,000 private tokens
        data: "0x",
      },
    ],
  });

KYC-Verified Privacy Features:

Automated compliance – Transfer only succeeds if both parties are KYC-verified
Zero-knowledge verification – KYC status verified without revealing identity details
Private amounts – Transfer amounts remain completely private
Regulatory confidence – Financial institution maintains oversight capability

6. Withdraw: Private to Public¶

Client B withdraws some private tokens back to public ERC20:

const withdrawReceipt = await privateStablecoin
  .using(paladin3)
  .withdraw(clientB, {
    amount: 15000, // Withdraw 15,000 tokens
  });

Withdrawal Benefits:

Seamless conversion – Private tokens automatically converted to public ERC20
Preserved compliance – KYC verification carries through to public domain
Full interoperability – Withdrawn tokens work with any ERC20-compatible system
Transparent balances – Public tokens provide transparency when needed

Privacy and Compliance Integration¶

How KYC Works with Zero-Knowledge Proofs¶

This example demonstrates a powerful combination of privacy and compliance:

Registration Phase – Financial institution registers client identities with their cryptographic keys
Proof Generation – During transfers, zero-knowledge proofs verify KYC status without revealing identity
Compliance Assurance – All private transactions are automatically verified against the KYC registry
Privacy Preservation – Transaction amounts and participant identities remain private to external observers

Use Cases¶

This private stablecoin with KYC pattern is suitable for:

Regulated DeFi protocols – Privacy-preserving DeFi with built-in compliance
Corporate treasury management – Enterprise payments with regulatory oversight
Cross-border remittances – Private transfers with KYC compliance
Wholesale CBDC implementations – Central bank digital currencies with privacy features
Supply chain finance – Private B2B payments with verified participants

Conclusion¶

The Private Stablecoin with KYC example demonstrates how Paladin enables:

Regulatory compliance through automated KYC verification using zero-knowledge proofs
Transaction privacy while maintaining compliance assurance
Seamless public-private interoperability through deposit/withdraw functionality
Financial institution control over customer onboarding and compliance
Enterprise-grade security through nullifier-based double-spend protection

This showcases Paladin's unique capability to balance privacy preservation with regulatory compliance, enabling financial institutions to offer innovative privacy-preserving services while meeting their compliance obligations.

Next Steps¶

Explore how Notarized Tokens and Privacy Groups work together to create comprehensive financial solutions with controlled oversight and selective disclosure.

Continue to the Bond Issuance Tutorial →