Reversible blockchain transactions are key to fighting crime in crypto

A Stanford University proposal to make crypto transactions reversible adds a wrinkle to discussions of crime and fraud prevention. Researchers suggested that mutability – the ability to reverse blockchain transactions – would help prevent crime.

One of the advantages of cryptocurrency is that it is possible for the market – individuals, traders and banks – to decide whether reversibility is desired. Not only would a new (reversible) cryptocurrency be able to test the acceptance or desire for reversible transactions, it would help test the idea that reversibility reduces crime.

Although cryptocurrency is not a tool of the dark web, it is sometimes portrayed as such. Fraud, fraud and other forms of crime occur and grow in proportion to the amount of money invested and the number of coins traded.

One of the main ways law enforcement addresses crime in crypto markets is with blockchain investigations. Blockchain forensics is a growing field of law enforcement where transactions are analyzed to track and recover stolen or fraudulently obtained cryptocurrency assets. It first came to prominence a few years ago when the United States Internal Revenue Service used it to successfully recover the ransom Colonial Pipeline paid to the hackers who took control of it. However, in the highly decentralized and risky world of cryptocurrencies and non-fungible tokens, blockchain forensics becomes an important tool for compliance as well as regulation, creating potential consequences for legitimate traders.

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Investigators are closely scrutinizing the transactions recorded on blockchains, looking for signs that people are trying to hide or conceal tokens. Some of these include quickly switching between ledgers, using tools that mask or fake IP addresses, multiple small transactions, and using a tumbler or mixer service, where crypto from many sources is aggregated to hide where it comes from.

Reversibility will make it much easier for law enforcement to recover stolen and fraudulently obtained funds, and reduce the potential rewards of crime. It can reduce the risk for banks and other established financial institutions by offering cryptocurrency services to the general public as opposed to being special investments. It will also reduce any problems associated with human error, such as “fat finger” errors. This will help make cryptocurrency much more useful for exchange, investment and other everyday uses.

On the other hand, reversibility – or mutability – would also meet the idea of ​​the blockchain itself. Possibility could make the blockchain as vulnerable to manipulation as any other repository of information, which would weaken one of its most important security features. And trying to impose a standard for when the blockchain can be edited would apparently violate another important function: decentralization.

The anonymous, decentralized nature of cryptocurrency financing makes the tension between regulators and cryptocurrency somewhat inevitable. For ideological or privacy reasons, many people are attracted to the promise of anonymity offered by the blockchain, but these features are attracting more scrutiny from regulators as that same anonymity can enable transactions ranging from those where taxes are not collected to the sale of illegal drugs or weapons or enable countries such as North Korea to avoid international sanctions.

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

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Opportunity will make blockchain investigation even more important for regulators and investors. As an analogy, various government agencies and financial institutions require companies and individuals to keep accurate financial records. Many fraud schemes require manipulation of these records – embezzlers have to cover their tracks, stock pickers try to convince people that a company is doing better than it actually is to inflate the stock price and on and on. When discovered, forensic accountants are called in to compile accurate accounts.

Blockchain forensics firms would end up protecting the integrity of the blockchain, effectively becoming the de facto central authority – leading to inevitable variations of Can we trust them?

But the final word on making the blockchain reversible or mutable should be the decentralized power of the market itself. The most unique thing about cryptocurrency is that there are and can be so many currencies competing against each other at once. In early modern Europe, a stable currency emerged out of hundreds of unstable ones, backed by high-purity precious metals and administered by a central bank. This “astonishing feat of men in tights”, as the economist Nathan Lewis memorably 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 trust their money are valuable.

Unless decentralized finance can come up with an alternative that improves security and stability without compromising its principles, a similar process may be underway.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.