“Infrastructural” participants of blockchain networks (e.g., miners, validators, and node operators) have varying degrees of freedom in performing their functions. They make choices for which they could be legally liable. Our focus is on the question what kind of legal liability is and should be attached to such network participants?
Dr Mikołaj Barczentewicz received a grant from the Ethereum Foundation for this project (the announcement).
As Vitalik Buterin observed, control - or even knowledge - can be a liability. For example, the extent to which validators have a choice in constructing blocks (especially as proposers) and how to perform other validator duties, increases the risk that they’ll be held legally liable for the choices they make. Given that validators have considerable freedom in how to perform their various functions, from a legal and regulatory perspective a distinction can be made between “good” (compliant) validators and “bad” (non-compliant) ones. For example, a validator who proposes a block including a transaction with a U.S. OFAC-sanctioned Ethereum address may find it difficult to argue that they did not have another choice, because it would have been technically possible - and perhaps not even very expensive - for them to do otherwise. Analogous issues arise for other Ethereum “base layer” or “infrastructural” operators/ network participants (like RPC/node operators, but also MEV-Boost relay operators, block-builders).
This creates a serious, perhaps even existential, risk to blockchains like Ethereum as public permissionless networks. It is thus worthwhile to develop a nuanced perspective on the role of, and benefits provided by, various “infrastructural” network participants (validators etc.).
We frame this as the issue of “credible neutrality” as perceived by the law. Credible neutrality could play a pivotal role in grounding legal and policy argument for limitations on interference with the basic operations of public permissionless blockchains. Overall, we ask which of the various functions performed by blockchain network participants could be seen, from a legal perspective, as credibly neutral.
It is understandable that regulators and law enforcement, in the U.S., the EU, and elsewhere, may be inclined to treat the infrastructural network participants as the right target for regulation or enforcement of rules, like sanctions or anti-market manipulation rules. However, such rules are rarely - if ever - applied to seemingly analogous actors or protocols in other contexts (e.g. SWIFT, telecommunications operators, operators of internet exchange points).
We are interested not only in the legal situation of infrastructural participants of blockchain networks (miners, validators, node/RPC operators) themselves, but also that of service providers directly serving them (e.g., private relay operators like Flashbots, specialized node hosting services like Infura or Alchemy).
Response to the U.S. Treasury Department’s consultation on digital assets and illicit finance
Submitted on 3 November 2022 by the International Center for Law & Economics. Arguing that, first, policymakers must determine which entities in the crypto ecosystem are the most appropriate targets for law-enforcement and national-security efforts. We suggest that the costs of targeting crypto’s infrastructural or “base” layer may to a disproportionate extent impede the attainment of other policy objectives. Second, it is important to determine the appropriate policy response to privacy-enhancing crypto technologies. As Treasury seeks to forward the goals of consumer and investor protection, promotion of access to finance, and support of technological advances, all those goals point in favor of facilitating responsible use of privacy-enhancing technologies, including “privacy coins.”
By Anton Wahrstätter, Jens Ernstberger, Aviv Yaish, Liyi Zhou, Kaihua Qin, Taro Tsuchiya, Sebastian Steinhorst, Davor Svetinovic, Nicolas Christin, Mikołaj Barczentewicz, Arthur Gervais
Download from arXiv
Permissionless blockchains promise to be resilient against censorship by a single entity. This suggests that deterministic rules, and not third-party actors, are responsible for deciding if a transaction is appended to the blockchain or not. In 2022, the U.S. Office of Foreign Assets Control (OFAC) sanctioned a Bitcoin mixer and an Ethereum application, putting the neutrality of permissionless blockchains to the test. In this paper, we formalize quantify and analyze the security impact of blockchain censorship. We start by defining censorship, followed by a quantitative assessment of current censorship practices. We find that 46% of Ethereum blocks were made by censoring actors that intend to comply with OFAC sanctions, indicating the significant impact of OFAC sanctions on the neutrality of public blockchains. We further uncover that censorship not only impacts neutrality, but also security. We show how after Ethereum’s move to Proof-of-Stake (PoS) and adoption of Proposer-Builder Separation (PBS) the inclusion of censored transactions was delayed by an average of 85%. Inclusion delays compromise a transaction’s security by, e.g., strengthening a sandwich adversary. Finally we prove a fundamental limitation of PoS and Proof-of-Work (PoW) protocols against censorship resilience.
SWIFT and crypto’s base layer: an analogy
Developing an analogy between SWIFT (and the position on legal compliance - especially with sanctions law - taken by them) and crypto’s base layer operators. Draft available on request.
Validator control as liability
The lack of “credible neutrality” of validators (e.g. from the perspective of sanctions law) may increase their risk of legal liability. If so, then it may be worthwhile to prioritize protocol-level changes to increase credible neutrality of validators. Draft available on request.