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Thursday, December 1, 2022

Reversible Blockchain Transactions Would Improve Cryptocurrency

A proposal from Stanford University to make crypto transactions reversible is adding to the conversation about crime and fraud prevention. The researchers believe that variability — the ability to reverse blockchain transactions — will help prevent crime.

One of the advantages of cryptocurrencies is that the market – individuals, traders and banks – can decide whether or not reversibility is required. A new (reversible) cryptocurrency could not only test the acceptance or desire for reversible transactions, but also help test the idea of ​​reversibility reducing crime.

Although cryptocurrencies are not darknet, it is sometimes depicted as such. Fraud, scams and other forms of crime do happen and are proportional to the amount invested and the number of coins traded.

One of the primary ways law enforcement tackles crime in the crypto market is blockchain forensics. Blockchain Forensics is a growing area of ​​law enforcement where transactions are analyzed to track and recover stolen or fraudulently obtained cryptocurrency assets. It first rose to prominence a few years ago when the IRS used it to successfully recover the Colonial Pipeline, a ransom paid to the hackers who controlled it. But in the highly fragmented and risky world of cryptocurrencies and non-fungible tokens, blockchain forensics is emerging as an important tool for compliance and regulation, with potential implications for legitimate traders.

related: Get ready for the federal government to start prosecuting NFT traders

Investigators scrutinize transactions recorded on the blockchain, looking for signs that people are trying to hide or disguise their tokens. Some of these include rapidly switching between ledgers, the use of tools to mask or forge IP addresses, multiple small transactions and the use of tumbler or hybrid services where encryption from many sources is pooled together to obscure its origin.

Reversibility will make it easier for law enforcement to recover stolen and fraudulently obtained funds, thereby reducing the potential rewards of crime.This can reduce banks and other established Financial institution Provide cryptocurrency services to the public, not special investments. It will also reduce any issues related to human error, such as “fat finger” errors. This will help make cryptocurrencies more useful for trading, investing and other everyday uses.

On the other hand, reversibility — or mutability — would also run counter to the idea of ​​the blockchain itself. Mutability could make a blockchain as vulnerable to manipulation as any other repository of information, which would make one of its key security features uninteresting. Trying to impose a standard for when a blockchain can be edited seems to violate another important characteristic: decentralization.

The anonymous, decentralized nature of cryptocurrency finance makes tensions between regulators and cryptocurrencies somewhat inevitable.Many are drawn to the promise of anonymity offered by blockchain for ideological or privacy reasons, but these features attract more scrutiny from regulators, as the same anonymity enables everything from not taxing to selling illicit transactions. Various deals in drugs or weapons or enabling countries such as North Korea evade international sanctions.

As cryptocurrencies become more mainstream, financial institutions and investors will also push regulators and exchanges to adopt safeguards or weaken anonymity to comply with securities and anti-money laundering laws.

related: Biden’s lackluster cryptocurrency framework offers nothing new

The variability will make blockchain forensics even more important to regulators and investors. For example, various government agencies and financial institutions require companies and individuals to maintain accurate financial records. Many fraudulent schemes require manipulating these records – embezzlers have to cover their tracks, stock traders try to convince people that a company is doing better than it really is in order to drive up share prices, etc. When they were discovered, forensic accountants were required to put together accurate financial statements.

Blockchain forensics firms will ultimately be responsible for protecting the integrity of the blockchain, effectively becoming the de facto central authority — and leading to inevitable change Can we trust them?

But making the blockchain reversible or mutable should be the decentralizing force of the market itself. The most unique thing about cryptocurrencies is that there are and can be so many currencies competing against each other at the same time. In early modern Europe, a stable currency emerged from hundreds of volatile currencies, backed by high-purity precious metals and administered by a central bank. As economist Nathan Lewis put it, “The amazing achievement of the man in the straitjacket” put It was driven not by power-hungry monarchs, but by merchants in places like London and Amsterdam who demanded stability, while ordinary people benefited because they could rely on their money for value.

unless Decentralized Finance An alternative could be proposed that improves security and stability without compromising its principles, and a similar process may be underway.

Brendan Cochran is YK Law’s Blockchain and Cryptocurrency Partner. He is also the principal and founder of CryptoCompli, a company focused on the compliance needs of cryptocurrency businesses.

This article is for general informational purposes only and is not intended and should not be considered legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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