Law expert Angela Walch debunks ‘censorship-resistance’ claims of many crypto promoters

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What are cryptocurrencies good for? That was the title and main topic of conversation at the U.S. Senate Banking Committee’s latest hearing on digital currencies.

Financial regulators around the world are closing in on the blockchain and digital currency industry, and many of the world’s financial watchdogs are looking to take action in the near future.

U.S. Treasury Secretary Janet Yellen recently held a meeting with the President’s Working Group on Financial Markets to establish regulatory frameworks for stablecoins; the U.S. Department of Justice is currently investigating Tether (USDT) executives over ​​bank fraud; and now the Senate Banking Committee is taking a closer look at the digital currency industry and its many different players.

The hearing

On July 27, the Senate Banking Committee convened to discuss all things digital currency with three witnesses: Angela Walch, a professor at St. Mary’s University School of Law; Jerry Brito, the executive director at CoinCenter; and Marta Belcher, the chair of the FileCoin foundation. Each witness has a long history of either researching, lobbying, or operating a business in the blockchain and digital currency industry.

While Brito and Belcher’s testimonies largely focused on all of the benefits that come from blockchain technology and digital currencies, Walch’s testimony provided a very balanced overview that looked at the pros, cons, and misunderstandings that come with digital currency.

Walch’s testimony was critical of how many blockchain networks operate, Walch pointed out that a lot of words used to describe blockchain networks are often exaggerations, and that once you examine how most networks operate, you quickly realize that many are run like centralized organizations.

“Crypto proponents use terms like ‘censorship-resistant’ and ‘permissionless’ to describe the benefits of crypto systems, stating that any two parties in the world are able to send and receive value directly—without going through or having to seek permission from an intermediary. If I were a dissident in an authoritarian country, I could see how this would be a lifeline,” Walch said.

“However, I believe that crypto proponents are overstating (perhaps innocently) the censorship-resistance of existing systems, and that they may not provide as much freedom as some hope, given the power of miners in the system to manipulate the ordering of transactions or delay them.”

What’s often overlooked is that digital currency miners can be gatekeepers to a blockchain network. Miners decide which transactions will be included—or not included—in the next block. Many digital currency supporters talk about transactions taking place peer-to-peer without a trusted third party to facilitate the transaction; but the truth is, on blockchain networks, peers are implicitly trusting digital currency miners to include their transactions in blocks.

“Miners select, order, and propose transactions to be added to the blockchain record. While many characterized crypto systems as lacking intermediaries and enabling the direct transfer of value between transacting parties, that is technically untrue. Transactions do not appear on the blockchain record unless a miner chooses to put them on,” Walch said.

Beyond miners, Walch pointed out that software developers also play a major role in blockchain governance. Walch said that both developers and miners are often excluded from conversations regarding regulatory framework and policy although both parties have a significant amount of power and impact on digital currency networks.

“I highlight these parties (developers and miners) because they have largely been left out of the policy and risk discussion, due to mainstream views of cryptocurrencies and crypto tokens as ‘things’ like commodities. From my perspective digital assets are highly malleable, subject to the actions of parties like developers, miners, and other participants in the applicable crypto system, and failing to take their malleable nature into account is a source of risk,” Walch said.

The Taproot upgrade on the BTC network is a prime example of software developers making decisions that govern the network. Via the Taproot update, the core developers are altering the BTC network in a way that would allegedly make it more efficient. However, this change that the developers are making has a trickle-down effect that exemplifies the power and influence major players like software developers have.

For starters, core developers decided that the BTC network needed this upgrade on their own accord—it was not a group or decentralized decision. Beyond that, not all miners and network participants want to support Taproot, yet nearly all miners will most likely comply and support the upgrade. Because if miners don’t support the upgrade, the blocks they create will be orphaned and their mining operation will no longer be generating revenue. To stay in business, miners must agree with the core developers—a prime example of the power and control Walch says miners and developers have over the network. Unfortunately, now that big money from tech giants is being deployed into the space, this abuse of power and the impact it has on network participants will only get worse.

“With large companies like Square now funding several Bitcoin developers, it will be important to acknowledge the conflicts of interest inherent in the relationship, and to ensure that the small group of software developers who run these financial infrastructures know where their duties run. For this reason, I have analogized the key software developers of systems like Bitcoin and Ethereum to fiduciaries, as large numbers of people depend on them to be both competent and to act in the best interest of the system,” Walch said.

Jack Dorsey’s Square is currently funding several BTC developers that have GitHub commit access. Through these developers, Square is able to make the changes they want to the BTC protocol without the liability that often comes with implementation; this is because Square is funding open source developers that are independent contractors. By design, Jack Dorsey and Square avoid liability while being able to influence how the network operates and the changes that can be made to it.

The role that many software developers play—especially when they work for organizations with corporate backing—often resembles the role that a centralized entity like a corporation plays when making business decisions; and despite the popular narratives about digital currency transactions taking place without the need for a trusted third-party intermediary, the role that miners play is very similar to the role a financial intermediary plays.

The reliance on miners and software developers brings liability into the picture, and corporate funding makes you stop and question why tech giants like Square want a stake in BTC development. If it’s possible to identify and attribute the successes, failures, implementations, and changes, on a blockchain network to a single developer or organization, then that individual or company becomes liable and legally responsible for the actions that take place as a result of their decision making.

Similar to Professor Angela Walch, Dr. Craig S. Wright’s work often examines the power that both core developers and commercial miners have, and how the role that these parties play is perceived from a legal standpoint. It’s worth noting that Satoshi Nakamoto never used the expressions “censorship resistant” or “permissionless”—these were incorporated into the Bitcoin lexicon by an individual associated with the Electronic Frontier Foundation (EFF) in 2011, after Dr. Wright stopped interacting with the ecosystem directly.

“For companies like Twitter, the undertaking of open-source projects allows them to distance themselves from liability, handing it to unsuspecting developers. In effect, such large Silicon Valley companies end up having products developed for them at near to no cost, with the risk and associated problems lying with third parties. That is, developers without knowledge of the law, or what they need to know about the development of software and the fiduciary duties that apply,” said Dr. Wright in his blog post, “Open source and liability.”

“The network is managed by a system of commercial nodes (the miners). Such entities act as a distributed fiduciary, controlling and ensuring the integrity of the Bitcoin network. They act as agents, and are paid for their task. They do not own the network or the database. They act on a unilateral agreement or contract, following a set of rules where they agree to verify transactions and create blocks in return for a payment,” said Dr. Wright in another post, titled “Nodes hashrate signalling.”

“Nodes have a fiduciary duty, and are paid to process transactions.,” said Dr. Wright in his post, titled “What is censorship resistance.”

And in “What proof of work is used for,” Dr. Wright noted, “To enforce the fiduciary controls that are required to be implemented in Bitcoin, nodes need to be accountable. To be held accountable and to be responsible, nodes need to be detectable.”

At the end of the day, there will always be someone legally responsible for decisions that are being made. Many digital currencies are falsely marketed in a way that leads the public to believe that there are no intermediaries, leaders, or individuals responsible for what happens to a blockchain network. But as the testimony from Walch and the research Dr. Wright shows, many of the major players in the blockchain and digital currency ecosystem have roles that are very similar to the roles trusted third parties and financial intermediaries play in the traditional financial system.

A realistic approach

It’s refreshing to see individuals like Professor Angela Walch and Dr. Craig S. Wright realistically and critically examining the cryptocurrency ecosystem. There are too many perma-optimists in the blockchain and digital currency ecosystem who only promote and discuss the benefits of these emerging markets without acknowledging the systematic risks that exist.

Regulators are aware of the dangers that comes with digital currencies and that is why they are trying to create policies and regulatory frameworks that mitigate the risks that the citizens/residents/investors in their country face in the blockchain and digital currency space. Becoming knowledgeable about the pros and cons of the industry and learning everything that they possibly can is the first step to accurately doing this—so it’s good to see regulators calling on a realist like Angela Walch in their quest for knowledge.

Watch: U.S. Congressman Patrick McHenry on Blockchain Policy Matters with Bitcoin Association’s Jimmy Nguyen