SummaryThe proliferation of network devices capable of gathering, transmitting, and receiving data over the Internet has spurred the widespread adoption of Internet of Things (IoT) devices, particularly in resource‐oriented applications. Integrating blockchain, IoT, homomorphic encryption, and federated learning requires a balance between computational requirements and real‐time performance. Secure key management is crucial to maintain data privacy and integrity. Compliance with privacy regulations requires careful implementation of privacy‐preserving mechanisms in blockchain‐enabled IoT environments, which can be subjected to various attacks. Addressing these challenges requires interdisciplinary expertise, research, and innovation to develop more efficient and effective privacy‐preserving techniques tailored to the unique characteristics of such environments. This research introduces the Modified Homomorphic Encryption Federated‐based Adaptive Hybrid Dandelion Search (MHEF‐AHDS) algorithm as an effective framework to enhance security in blockchain‐enabled IoT systems. The amalgamation of Modified Homomorphic Encryption (MHE) and Federated Learning (FL) constitutes a potent alliance that addresses privacy concerns within collaborative and decentralized machine learning environments. This facilitates secure and adaptable data collaboration, effectively mitigating privacy risks associated with sensitive information. The integration of quantum machine learning into security applications presents an exciting opportunity for distinctive progress and innovation. Within this work, the Adaptive Hybrid Dandelion optimization algorithm, featuring an Initial search strategy, is employed for hyperparameter optimization thereby elevating the performances of the proposed MHEF‐AHDS method. Furthermore, the integration of smart contracts and Blockchain‐based IoT enhances the overall security of the proposed method. MHEF‐AHDS comprehensively tackles privacy, security, and scalability challenges through robust security measures and privacy enhancements. The performance evaluation of the MHEF‐AHDS method encompasses a thorough analysis based on key metrics such as throughput, latency, scalability, energy consumption, accuracy, precision, recall, and f1‐score. Comparative assessments against existing methods are conducted to gauge the effectiveness of the proposed method in addressing security, privacy, and scalability concerns.