the Trojan horse of crypto space regulation

Every now and then, the crypto community crowns a new king for secure transactions. and the final king seems to be multiparty computing, or MPC. This year, the introduction of MPC by custodian and non-custodian agents has progressed and caught on in the market very quickly.

It might come at a price, however. MPC providers offer regulators a back door for cryptocurrency transactions. If the industry increasingly relies on MPC for security reasons, it could jeopardize the long-standing principles of decentralization and resistance to censorship.

The hidden functions of MPC

To determine where the risks are, let’s briefly review the MPC and how it’s used. At the simplest level In MPC technology, private keys are divided into segments and distributed among different parties. Typically, the customer has one key segment and the MPC provider another. The aim is to improve security by ensuring that neither party has full control over a particular transaction. This can only be carried out if both parties provide their key segments.

the Trojan horse of crypto space regulation
the Trojan horse of crypto space regulation

MPC service providers often present their technology as a simple aid in securing transactions. It is sold under the premise: “We keep half a key, you keep the other half, but you are the boss, only you decide when and where to transfer your money. You can also withdraw all of your money from our account whenever you want.”

In reality, however, that is not exactly the case. MPC service providers act as intermediaries whose approval is required to carry out a transaction.

In this regard, MPC providers play an almost identical role as banks, with blockchain playing the role of the SWIFT system. You can replace the sender’s bank with an external MPC service provider and replace the SWIFT system with the blockchain. The only difference is how the sender sends the payment. At a bank, the sender instructs the bank to release the funds. With an MPC provider, the sender and the provider jointly sign the transaction. Both parties send a partial key, which the MPC service provider then sends to the blockchain.

It could be argued that there is a significant difference between banks and MPC providers that is not included in this comparison: Banks can freeze and even confiscate funds. The problem, however, is that those backdoors exist with MPC providers as well.

There is no argument here that MPC providers are simply bad guys who want to steal their customers’ money. As professional and reputable companies that work with institutions, they have to meet one of the main requirements of their customers: that cryptocurrency funds can be recovered if someone loses their key.

Private key security has long been a sticking point for cryptocurrency institutions and businesses. Therefore, the ability to recover money in the event of key loss is vital for any company that claims to offer secure storage of cryptocurrencies. Imagine a bank that did not allow you to recover a forgotten password and just say that when you lost your money was lost forever.

Here comes the regulator

Given the responsibility they, as a third party, have for customer funds, it is clear that MPC providers offer a back door for regulatory interference. Finally, This means that MPC companies could play the same role as banks.

If a regulatory agency requires an MPC service provider to stop a transaction, it must do so. Also, when MPC providers allow users to recover lost keys, it means a regulator can also bring a lawsuit for forfeiture. Assuming this is a legally binding request, the supplier would be forced to comply again if they wanted to stay in business.

This is not a mere exaggeration. The regulators are here. In June 2019, the Financial Action Task Force (FATF) approved an initiative regulate virtual assets and virtual asset service managers. Although overall compliance is still low, we can be sure that The FATF will continue to expand the network until all providers of virtual asset services are included.

While the crypto community has focused on how exchanges manage FATF regulation, MPC providers are also perfect for the profile of a virtual asset service provider who manages and transfers funds from customers in a manner similar to a bank transfer. The same regulatory conditions apply to all companies that directly or indirectly own, manage or control virtual assets.

Therefore, this regulation creates the same expectations for MPCs as those currently applied to the banking system. Ultimately, this could result in large transactions being reported back to the regulator and customers being subject to the same knowledge of your customer and anti-money laundering requirements as a bank account.

Traditional banks to run MPC?

If more evidence is needed, all we have to do is look Large banks that have already recognized that MPC technology offers benefits that are in line with their existing legal framework. Citibank and Goldman Sachs already have invested at MPC providers and we can expect many more to be announced very soon. With the office of Auditor of the Treasury Currency of the United States already approved cryptocurrency management services For banks with a federal license, MPC offers an easy-to-regulate option for banks to enter the crypto room.

The fact that MPC service providers restrict their customers’ mobility by creating dependency on their own wallets could also be attractive to banks. Creating a kind of enforced loyalty far from the vision of open finance that many in the world cherish in the crypto space.

It is easy to assume that Such a network only manages “authorized” coins and currencies. “Uncontrolled” assets like your Bitcoin (BTC), They don’t generate the fees they might charge for authorized transactions and are even banned over time.

To summarize everything

On a technical level MPC is impressive and could be perfect for gamers who have no concerns about regulators’ involvement in the crypto space. For those who do, however, it’s worth noting that it also provides a back door to the regulated and centralized cryptosphere, just as regulated and centralized exchanges are already experiencing. This is reason enough to think twice before applying or using it.

As a last point It’s worth noting that the technology is still in its infancy. There is a vision for creating a decentralized MPC, but such a solution is far from being developed. The road is still long and winding, but it would be a step in the right direction for those who hold the original vision of decentralized open networks that underpin an Internet of value. I urge you to ask your MPC service provider what if you lose your wallet or semen.

This article does not contain any investment recommendations or recommendations. Every investment and trading step is associated with risks. Readers should do their own research in making their decision.

The views, thoughts, and opinions expressed herein belong solely to the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Asaf Naim is the CEO of Kirobo developing a logical layer on the blockchain that protects users from human error. He discovered cryptocurrencies for the first time in 2013 and was thrilled. He believes in the future of digital currencies and is passionate about the concept of network decentralization. Asaf is an accountant with a masters degree and has over 15 years of fintech experience, as well as experience in blockchain and cryptocurrencies, startup development, online banking, and technology solutions and products.

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