From time to time, the crypto community crowns a new king of secure transactions, and the newest king seems to be multipart calculationor MPC. This year, MPC’s adoption by custodial and noncustodial players has advanced and gained market traction at a rapid pace.

However, it can come at a price. MPC providers offer regulators a back door to cryptocurrency transactions. As the industry becomes more dependent on MPC for security, it could eventually compromise on the long-standing principles of decentralization and censorship resilience.

The hidden features of MPC

To determine where the risks exist, let’s briefly come back to MPC and how it is used. At its most basic level, MPC technology involves splitting private keys into segments and distributing them between different parties. Typically, the customer has one major segment and the MPC provider another. The goal is to improve security by ensuring that no one party has full control over a particular transaction, which can only be executed if both parties deliver their key segments.

MPC service providers usually present their technology as something that only helps to secure transactions. It is sold under the premise, “We keep half a key, you keep the other half, but you’re in charge – only you decide when and where to transfer your money. You can also withdraw all your money from our account whenever you want. “

But in reality, that’s not exactly the case. MPC service providers act as intermediaries whose approval is required to execute a transaction.

In this sense, MPC providers play an almost identical role to banks, with blockchain playing the role of the SWIFT system. You can replace the sender’s bank with a third-party MPC service provider and replace the SWIFT system with the blockchain. The only difference here is how the sender sends the payment. At a bank, the sender orders the bank to release the money; with an MPC provider, the sender and provider jointly sign the transaction. Both parties submit a partial key which is then sent to the blockchain by the MPC service provider.

You could argue that there is a significant difference between banks and MPC providers that are not included in this comparison: banks can freeze and even confiscate funds. The problem, however, is that such loopholes also exist with MPC providers.

There is no argument here that MPC providers are just bad guys looking to rob their customers of their money. As reputable, professional companies working with institutions, they must meet a primary demand from their clients: that crypto funds can be reclaimed if someone loses their key.

Private key security has long been a bottleneck for institutions and crypto companies. Thus, the ability to get a refund in the event of a key loss is absolutely crucial for any company claiming to offer secure crypto storage. Imagine a bank that didn’t allow you to recover a forgotten password, simply by telling you that if you lose your password, your money will be gone forever.

Here comes the regulator

In light of the responsibility they have as a third party for the client’s money, it is clear that MPC providers provide a back door for regulatory intervention. Ultimately, this means that MPC companies could play the same role as banks.

If a legal authority requires an MPC service provider to stop a transaction, it is forced to do so. In addition, if MPC providers allow users to recover lost keys, it means that a supervisor can also request to seize funds. Again, assuming this is a legally binding request, the provider would be forced to comply if he wants to continue working.

This is not just an exaggeration. The regulators are already there. In June 2019, the Financial Action Task Force, or FATF, approved an initiative for regulating virtual assets and administrators of virtual asset services. While overall compliance is still low, we can be sure that the FATF will continue to broaden the net until all Virtual Asset Service Providers are included.

While the focus of the crypto community has been on how exchanges will manage FATF regulations, MPC providers also fit perfectly with the profile of a Virtual Asset Service Provider, who manages and transfers client money in a similar way to a bank transfer. The same regulatory terms apply to all companies that directly or indirectly hold, manage or control virtual assets.

It follows that this Regulation creates the same expectations of MPCs as those currently applied to the banking system. Ultimately, this could mean reporting large transactions to the regulator, and customers being subject to the same Know Your Customer and Anti-Money Laundering requirements as for a bank account.

Traditional Banks To Run MPCs?

If more evidence is needed, all we need to do is look at the major banks that have already recognized that MPC technology offers benefits that fit their existing compliance frameworks. Citibank and Goldman Sachs have already done that invested in MPC providers, and we can expect many more to be announced soon. With the US Treasury Department of the Comptroller of the Currency already green lit crypto custody services For federally chartered banks, MPC provides a regulator-friendly way for banks to dig into the crypto stack.

The fact that MPC service providers are limiting the mobility of their customers by creating dependence on their own wallets could also appeal to banks, creating a kind of enforced loyalty that is far from the vision of open finance that many in the world are pursuing. to the heart. crypto space.

It is easy to assume that such a network only manages ‘authorized’ currencies and coins. “Uncontrolled” assets, such as your personal Bitcoin (BTC), does not generate the kind of fees they might charge for authorized transactions and may even be banned over time.

To sum it all up

On a technical level, MPC is impressive and perhaps perfectly suited to players who aren’t concerned about regulators getting involved with crypto. For those who do, it’s worth being aware that it also provides a back door to the regulated and centralized cryptosphere, just as regulated and centralized exchanges already experience. This is reason enough to think twice before advocating or using it.

As a final point, it is worth adding that the technology is still in its infancy. There is a vision for creating a decentralized MPC, but it is far from a developed solution. The route there is still long and winding, but it would be a step in the right direction for those who defend the original vision of decentralized, open networks supporting an Internet of value. I urge you to ask your MPC service provider what will happen if you lose your wallet or your seed.

This article does not contain investment advice or recommendations. Every investment and trade move carries risks, readers should do their own research when making a decision.

The views, thoughts and opinions expressed here are solely of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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 staunch advocate of the concept of network decentralization. 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.