Hide crypto balances and transfer histories from third parties while blocking the inflow of illicit funds. That is the pitch behind zERC20 v2, the new version of the privacy transfer protocol that zERC20 Limited released on mainnet on Nov. 4. Transfers between users do not display the sender, recipient, or amount on the blockchain, while deposits and withdrawals go through screening by blockchain analytics firm Chainalysis. Rather than full anonymity, the design lets users themselves choose what to disclose.
zERC20 is a protocol developed by core developers of the layer-2 project INTMAX, with the first version, v1, released in February this year. In v2, tokens such as the dollar-denominated stablecoin USDC and ETH are converted one-to-one into backed "z" versions and held as private balances that outsiders cannot see. When funds are sent between zERC20 accounts, who paid whom and how much is not recorded on-chain. The sender and amount at deposit, and the destination and amount at withdrawal, are public, but the activity in between remains private.
The company also reduced the hassle of use. No dedicated app installation is required; users create an account in a browser and open it with a passkey such as Face ID or fingerprint authentication. Sending tokens from an existing wallet or crypto exchange to a one-time deposit address credits the private balance. For transfers and withdrawals, a relayer that intermediates transactions submits them on the user's behalf and takes a small fee from the tokens being sent, so there is no need to separately prepare ETH or another token for gas. The fee itself is not free.
The protocol supports five networks: Ethereum, Base, Arbitrum One, BNB Smart Chain, and Polygon. At launch, available assets are zETH and zUSDC on Ethereum, Base, and Arbitrum One; zBNB on BNB Smart Chain; and zPOL, zUSDC, and zJPYC on Polygon.
Note: Availability at launch. zJPYC and zUSDC are unofficial wrapped tokens provided independently by zERC20; JPYC Inc. and Circle are not involved in their provision, joint development, review, or endorsement.
Measures against illicit use are layered. Deposit-source and withdrawal-destination addresses are screened by Chainalysis, and deposits deemed problematic are not credited to private balances, with only refunds to the sender permitted. An on-chain blocklist of sanctioned addresses and others is also in place, and listed addresses cannot send or receive z-tokens or wrap and unwrap them. All changes to the list are made public, and in cases such as hacking incidents, addresses can be frozen individually. In addition, an attester server verifies all private transfers and withdrawals, and only transactions meeting the conditions are accepted on-chain.
There is also consideration for not abandoning transparency entirely. Users can use a "view key" to grant designated parties such as accountants the right to view balances and transaction histories. Viewing rights do not allow funds to be moved. The system also allows a designated auditor, only in the event of a legal request, to review the history of a target account after an approval process, and in such cases the fact that a view key was used is recorded in a public log.
Technically, the protocol uses zero-knowledge proofs (ZK) to prove the legitimacy of transactions without revealing the sender or the origin of funds. It is non-custodial, meaning the operating company cannot move users' funds, and changes to the protocol require a multisig that includes independent external signers, so zERC20 alone cannot update it. The company said it modeled everything from smart contracts to ZK circuits using Groth16 and Nova in Lean4 and formally proved that funds cannot be used by anyone other than the legitimate owner, that double-spending is prevented, and that the token pool backs all balances. It also built in a mechanism using a trusted execution environment (TEE) to verify legitimacy without disclosing the secret information needed for proofs.
That said, privacy is not fully guaranteed. The official documentation warns that usage patterns with distinctive amounts or timing, such as withdrawing the same amount immediately after a deposit, may allow third parties to infer transactions.
Past incidents are also part of the backdrop. On Sept. 13, an unauthorized issuance of 9.965 million zJPYC occurred on Polygon, and the attacker swapped part of it for JPYC, with about 3.35 million JPYC (roughly 3.35 million yen) flowing out externally. The cause was explained as a known vulnerability in Nova combined with a configuration error that left a bulk-withdrawal function, which should have been disabled, usable. The operating team said it would fully compensate affected users' assets and announced recurrence-prevention measures including post-deployment audits and stronger on-chain monitoring.
zERC20 Limited CEO Mai Fujimoto said that in developing v2, the team kept in mind the balance between privacy and compliance and pursued ease of use for private payments and receipts. She said that eliminating the need to top up gas tokens also resolves concerns about privacy leaks associated with such top-ups.
The older v1 halted wrapping and private transfers as of 9 a.m. Japan time on Nov. 4 (7 p.m. EST on Nov. 3). Withdrawals from v1 remain possible until April 30, 2027, and users must withdraw their funds and then deposit them into v2.
As stablecoin payments spread into corporate transactions and everyday payments, transfer transparency can expose payment amounts to competitors, business partners, and balances. Privacy features are becoming a basic requirement of payment infrastructure rather than an add-on service. At the same time, regulators and financial institutions are watching closely whether such systems can coexist with anti-money-laundering measures, and how effectively screening at deposit and withdrawal and auditability can be operated is likely to determine whether these protocols gain widespread adoption.
