The Trojan Horse of crypto regulation

Every once in a while, the crypto community crowns a new king for secure transactions, and the latest king seems to be multiparty computation, or MPC. This year, MPC adoption by custodial and noncustodial players has progressed and gained market traction at a rapid pace.

However, it could come at a price. MPC providers offer regulators a backdoor into cryptocurrency transactions. As the industry becomes more reliant on MPC for security, it could end up compromising on the 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 on MPC and how it’s used. At the most basic level, MPC technology involves splitting private keys into segments and distributing them between different parties. Most commonly, the client holds one key segment, and the MPC provider holds another. The aim is to improve security by ensuring that no party has full control over any given transaction, which can only be executed if both parties provide their key segments.

MPC service providers usually present their technology as something that merely helps to secure transactions. It’s sold under the premise of: “We keep half a key, you keep the other half, but you are the boss — only you decide when and where to transfer your funds. You can also pull all your funds from our account whenever you want.”

But in reality, that isn’t exactly the case. MPC service providers act as middlemen whose approval is needed for a transaction to be executed.

In this sense, MPC providers are playing a near-identical role to banks, with blockchain serving the role played by the SWIFT system. You could replace the sender’s bank with an MPC third-party service provider and replace the SWIFT system with the blockchain. The sole difference here lies in how the sender sends the payment. With a bank, the sender instructs the bank to release the funds; with an MPC provider, the sender and provider jointly sign…

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