How Do Zero-Knowledge Proofs Enable Transaction Verification for AML Purposes without Revealing Sensitive User Data?

Zero-knowledge proofs (ZKPs) allow a "prover" (the user) to demonstrate to a "verifier" (a smart contract or regulator) that a statement is true, without revealing any information beyond the statement's validity. For AML, a user could prove that their identity has been verified by an authorized party, that their funds are not from a sanctioned address, or that a transaction is within a certain limit.

The ZKP mathematically confirms these facts are true without exposing the user's actual identity, transaction history, or exact amounts, thus balancing compliance with privacy.