Toward embedded privacy-preserving compliance in Web3

How FHE and on-chain policy enforcement reshape the future of regulation

The tension between decentralization and regulatory compliance has long been a defining challenge for blockchain technologies. With the European Data Protection Board’s recent draft guidelines reiterating the absolute requirement for personal data erasure under GDPR, this challenge has entered a new phase.

Public blockchains, by their nature, are immutable. Yet regulatory expectations increasingly insist on the ability to erase or render inaccessible any trace of personal data upon user request. If interpreted narrowly, this demand could threaten the viability of public, permissionless networks within Europe, forcing innovation to migrate elsewhere precisely when initiatives like MiCA aim to anchor the digital economy within the Union.

However, abandoning decentralization is neither desirable nor necessary. A new technological architecture is emerging that bridges these worlds, combining advanced cryptography with native on-chain enforcement. Privacy-preserving compliance, embedded at the protocol level, offers a viable and sustainable path forward.

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Beyond encryption: redefining compliance at the protocol layer

Traditional models of data protection, such as encrypting sensitive information before storage or deleting access keys on request, fall short of GDPR’s strict interpretation of the right to be forgotten. Encryption alone, even when performed client-side, leaves the physical presence of data intact. In the regulatory view, it is the existence of the data itself that matters, not just its accessibility.

Zero-knowledge proofs have extended the frontier by enabling fact verification without revealing underlying data. However, they often assume that the data still exists somewhere in an accessible form, even if obfuscated or selectively disclosed.

A true solution requires a transformation of how data is processed. Instead of securing stored data, the objective must be to secure the computation itself.

This is where Fully Homomorphic Encryption (FHE), and specifically Torus FHE (TFHE), becomes critical. FHE allows computations to be performed directly on encrypted data. At no point is the plaintext revealed, and no intermediary can ever access the original information. Compliance checks, such as verifying user age, nationality, or risk assessments, can be performed entirely within the encrypted domain. Processing and verification occur without exposure, providing a foundation for GDPR-aligned operations in decentralized environments.

At ComPilot , we have built this capability using Zama TFHE technology. User data is encrypted from the outset, processed in encrypted form throughout compliance verifications, and stored without ever revealing plaintext. If a user exercises their right to be forgotten, deletion of access keys renders the encrypted data permanently inaccessible. This approach aligns both technically and philosophically with GDPR’s emphasis on user control and data minimization.

Yet encryption of processing, while necessary, is not sufficient on its own.

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Toward embedded automated supervision

To truly satisfy both the spirit and letter of modern regulatory frameworks, compliance must evolve from an external process into an internal protocol function. This demands embedding regulatory logic directly within smart contracts and decentralized infrastructure.

Rather than relying on centralized services or manual audits, policy enforcement must become automatic, auditable, and verifiable on-chain.

Smart contracts, operating in environments enhanced by FHE, such as an fhEVM, are capable of evaluating compliance policies in real-time over encrypted data inputs. These contracts can determine user eligibility, enforce transaction limits, conduct sanctions screening, and monitor risk exposure without ever accessing or revealing personal information.

In this architecture:

• Every compliance check is integrated into the execution environment itself.
• Proofs of compliance are automatically generated as cryptographic attestations.
• Supervisory authorities can verify that obligations have been fulfilled without accessing the underlying data.

This model does not compromise the immutability of blockchain. It refines the object of immutability from raw data storage to cryptographically verifiable policy adherence.

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Architecture for the future of decentralized compliance

The architecture to enable this vision involves three core layers:

First, data is encrypted at the user side using FHE before any interaction with the blockchain. Second, compliance policies are codified into smart contracts that operate entirely over encrypted inputs. Third, an audit layer generates verifiable proofs of compliance outcomes, accessible to regulators and counterparties without disclosure of sensitive information.

If a user requests data erasure under GDPR, revocation of key shards renders all associated encrypted data permanently opaque. The system records the proof of deletion, completing the regulatory cycle without compromising blockchain integrity.

This approach offers a compliance system that is transparent without being invasive, auditable without compromising privacy, and enforceable without the need for trust in centralized intermediaries.

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Building a European model for privacy-preserving decentralization

The European Union has established itself as a global leader in data protection. Its challenge now is to reconcile that leadership with its ambition to promote a thriving digital economy based on open, decentralized infrastructure.

Privacy-preserving compliance, enabled by FHE and on-chain policy enforcement, shows that this reconciliation is possible. Rather than treating regulation as an external force acting upon decentralized systems, it can be integrated directly into their operation, strengthening user rights, enhancing system trustworthiness, and ensuring long-term regulatory sustainability.

At Compilot, together with Zama, we have demonstrated that this is not just theoretical. It is practical, it is operational, and it is ready to scale.

The future of Web3 in Europe will belong to those who understand that decentralization and compliance are not enemies but potential allies. Embedded, automated, privacy-preserving supervision is the bridge between them.

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For a demonstration of encrypted compliance verifications processed in real conditions, view our live demo, and to discuss how our solution could fit with your specific needs, get in touch with the team at contact@compilot.ai.

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