Every now and then the crypto community crowns a new king for secure transactions, and the last king appears to be multi-party computing, or MPC. This year, the adoption of MPCs by depository and non-depository actors has grown and gained popularity in the market at a rapid pace.
However, it could come at a price. MPC providers offer regulators a backdoor into cryptocurrency transactions. As the industry increasingly relies on MPCs for security, it could end up compromising long-held principles of decentralization and censorship resistance.
The hidden features of MPC
In order to identify where the risks exist, let’s briefly recap the MPC and its use. At the most basic level, MPC technology involves dividing private keys into segments and distributing them among different parts. Most often the customer has one key segment and the MPC provider has another. The goal is to improve security by ensuring that neither party has full control over a given transaction, which can only be executed if both parties provide their key segments.
MPC service providers typically market their technology as something that simply helps secure transactions. It is sold on the following principle: “We keep half a key, you keep the other half, but you are the boss – you alone decide when and where to transfer your funds. You can also withdraw all your funds from our account whenever you want. “
But in reality, this is not exactly the case. MPC service providers act as intermediaries whose approval is necessary for a transaction to be executed.
In this sense, MPC providers play an almost identical role to banks, with blockchain playing the role played by the SWIFT system. You can replace the sender’s bank with a third-party MPC service provider and replace the SWIFT system with blockchain. The only difference here is how the sender sends the payment. With a bank, the sender orders the bank to release the funds; with an MPC provider, the sender and the provider jointly sign the transaction. Both parties submit a partial key which is then passed to the blockchain by the MPC service provider.
It could be argued that there is a significant difference between banks and MPC providers that is not factored into this comparison: banks can freeze funds and even confiscate them. However, the problem is that such backdoors also exist in MPC providers.
There is no argument here that the MPC providers are just bad guys who want to rob their clients of their funds. As reputable professional companies working with institutions, they have to meet one main demand of their clients – that crypto funds be recoverable if someone loses their key.
The security of private keys has long been a sticking point for crypto institutions and companies. Thus, the ability to recover funds in the event of key loss is absolutely essential for any business that claims to offer secure encrypted storage. Imagine a bank that didn’t allow you to retrieve a forgotten password, just telling you if you lost your password your money is gone forever.
Here is the regulator
In light of the responsibility they hold for client funds as a third party, it is evident that MPC providers offer a back door for regulatory intervention. Ultimately, this means that MPC companies could play the same role as banks.
If a legal authority asks an MPC service provider to stop a transaction, it will be obligated to do so. In addition, if MPC providers allow users to recover lost keys, it means that a regulator could also issue a fund forfeiture request. Again, assuming this is a legally binding request, the supplier would be obligated to comply if they wish to stay in business.
This is not a simple hyperbole. The regulators are already there. In June 2019, the Financial Action Task Force, or FATF, approved an initiative to regulate virtual assets and virtual asset service managers. While overall compliance is still low, we can be assured that the FATF will continue to expand the network until all virtual asset service providers are included.
While the crypto community has focused on how the exchanges will handle the FATF settlement, MPC providers also fit the profile of a virtual asset service provider perfectly, which manages and transfers client funds from the same way as a bank transfer. The same regulatory conditions apply to all companies that directly or indirectly own, manage or control virtual assets.
It therefore follows that this regulation creates the same expectations on the part of MPCs that are currently applied to the banking system. Ultimately, this could mean that large transactions need to be reported to the regulator and that customers are subject to the same know your customer and anti-money laundering requirements as a bank account.
Traditional banks to manage MPCs?
If more evidence is needed, we need only look at the major banks that have already recognized that MPC technology offers benefits that align with their existing compliance frameworks. Citibank and Goldman Sachs have already invested in MPC providers, and we can expect many more to be announced very soon. With the US Treasury’s Office of the Comptroller of the Currency having already set up crypto custody services for federally chartered banks, MPC is offering banks a user-friendly way for regulators to start digging into the crypto stack.
The fact that MPC service providers limit the mobility of their clients by creating a dependence on their own portfolio could also prove attractive to banks, creating a kind of forced loyalty far removed from the vision of the bank. open finance dear to many around the world. crypto space.
It is easy to assume that such a network will only handle “authorized” currencies and coins. “Unchecked” assets, like your personal Bitcoin (BTC), won’t generate the kind of fees they might charge on authorized transactions, and might even be banned over time.
To sum it all up
Technically, MPC is impressive and could be a perfect fit for players who don’t mind regulators getting involved in crypto. However, for those who do, it should be known that it also provides a backdoor to the regulated and centralized cryptosphere in the same way that regulated and centralized exchanges already know it. This is reason enough to think twice before advocating or using it.
Finally, it should be added that the technology is still in its infancy. There is a vision for creating a decentralized MPC, but it is far from being a developed solution. There is still a long and winding road there, but it would be a step in the right direction for those who advocate the original vision of decentralized and open networks underpinning a valuable Internet. I urge you to ask your MPC service provider what happens if you lose your wallet or your seeds.
This article does not contain any investment advice or recommendations. Every investment and trading move carries risk, readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of TBEN.
Asaf Naim is the CEO of Kirobo, which is developing a logic layer in the blockchain that protects users from human error. He first discovered crypto in 2013 and was hooked. He believes in the future of digital currencies and is a strong supporter of the concept of decentralized networks. Asaf is an accountant with a master’s degree and has over 15 years of fintech experience as well as expertise in blockchain and cryptocurrencies, startup development, online banking, and technology solutions and products. .