Layer 4 is a Policeman!

Ethereum is now a government information system

In October 2022, two separate news items flashed across the crypto ticker: one, that the CFTC was studying the feasibility of real-time monitoring all Ethereum transactions, and two, that the EU Commission was tendering a feasibility study for the very same. No further details were given. When a government announces a “study,” it means they are dead set on getting it done. 

The road towards this momentous decision — and we shall soon see why the word ‘momentous’ is not hyperbole — started with the outbreak of the War in Ukraine. Perhaps earlier still, with the Bored Ape Yacht Club craze in January 2022, but we have no proof of that. What we have proof of is that millions of dollars worth of Bitcoin, Ethereum, but mostly stablecoins like USDT/C, some DAI, were transferred from donors in the West to the Ministry of Defense in Ukraine to the East, ostensibly in “support of the war effort” — yes that term is back — in reality, very clearly, to allow Ukraine to buy weapons to defend itself against Putin’s Russia’s aggression. We shall fight on the beaches, and she pay for it in Bitcoin. 

And there you have it: for the first time in an open and understandably defensible manner, digital assets sent over unmonitored public blockchains, allowed a national state to arm itself against a vile aggressor. If financial history remembers one thing about the Russian occupation, it is that Howitzers were paid for in ETH. 

That, in itself, innocuous, even defensible, even welcome, for it took many more months before the governments of Europe and America could reach a consensus to send money and weapons to the beleaguered NATO and EU candidate under attack by a maniacal dictator. Blockchain technology allowed for immediate help, tokens for tanks! And no one was there to stop the transactions or even monitor them. It was good old-fashioned crypto sleuthing that uncovered those payments; on-chain data followed the trail of weapons shipments from South Africa across Israel. A “war bond” was issued on MakerDAO, and one on AAVE, although proof remains elusive. They could have been buying grain with it. They did not. 

The secret services and militaries of the western world shook their collective heads in disbelief. Buying weapons should not be that easy. What if ISIS was next, or another terrorist organization; a rogue state perhaps, Iran, or North Korea, or anyone not to our liberal liking? What if nuclear warheads detonated, smuggled and paid for in Dogecoin?

The Bundesnachrichtendienst, Germany’s CIA, allegedly recruited close to 200 staff (ex-hackers, white hats, cybersecurity and blockchain experts) to look closer into the nuisance known as “cryptocurrencies.” And what did they find? Criminal activity everywhere. A staking pool on Cardano allegedly, ostensibly used to stake for Ukraine’s reconstruction, but who knows? Monies wired across the globe, beyond the control of governments. NFTs used to launder ill-gotten gains, even for the purpose of human trafficking. The powers that be were aghast. A conference took place, in secrecy (and in Stockholm), between the major law enforcement agencies, to discuss the burning question: how the fuck did we not know this, and what the Dickens can we do to stop it?

There followed months of intensive consultation, of coordinating and collaborating, of calculating and criticizing, of tabulating and testing, vetting and verifying, and at the end of this process, a picture emerged (with the collapse of LUNA half-way exacerbating the pressure) that something had to be done to a) prevent criminals to use that mysterious “blockchain phenomenon” for nefarious gains and b) protect consumers from the irresponsible, irreverent, and seemingly irrational activities of thenceforth dubbed “crypto criminals.”

With experts aboard the inspection train, it become obvious that the problem was far bigger than initially thought, that fraud and deception had gone on for a long time, that crypto was indeed full of crooks, and that action was called for in the name of law and order. Not, as the fans of this “cryptographic currencies” subsumed, because governments craved power and domination, but indeed, (benefit of the doubt) to protect the world form worse to come, as it, undoubtedly would, if one were to let this go on. One could not. One had to act. Something had to be done. 

And just like banks have to comply with laws and legislation, from AML to KYC, from “transporting rules” to “transaction monitoring” a plethora of terms long known to any compliance officer would need to be applied to that mysterious world of De-Fi. The name alone! Defy! How dare they! Defy (DeFi) our long-established checks and balances, our rules and regulations! Empower the people and the perpetrators alike. 

Several proposals were floated, from self-reporting requirements to arbitrary restrictions in size to outright banning; from limiting transactions on anonymous addresses to forbidding the use of blockchain altogether. It became clear that none of these would work, in a world where it took but one electronic calculation machine to plug oneself into a global network of blockchain transferability, were exorbitant sums could be sent in a matter of seconds from one corner of the Earth to the next, without asking for permission, without giving a reasons, without anyone to check and no one to stop such impertinent activity. 

So, as experts weighed in and lawyers opined, as compliance agents sighed and secret service agents cringed, in the end, it became clear that the only way to move forward was to monitor closely what was going on in that ethereal realm, that Ethereum “chain,” which after all, seemed to be the main means of malevolent messaging. And such monitoring had to happen in real time, and perhaps with an option to stop a transaction if it did not pass muster. A policeman was needed, a guard, a task force, a SWAT team, and ultimately, a gaoler. 

So here we are, at the eve of the end of privacy, the end of DeFi, the defamation of decentralization: Ethereum, it was decided, was a messaging system whose messages had to be intercepted and checked and blocked and prevented from reaching their destination. Those clever snippets of code, self-executing contracts of wanton wisdom (who the hell started calling them ‘smart’?) had to be brought to heel, flogged, tied up, tethered and shackled. 

Ethereum, for all intents and purposes, has lost its freedom. Ethereum has become, with one (two, in fact) press announcements, a person (a chain, rather) of interest, a suspect, a perpetrator of doom and an instrument of destruction, a bad actor that needed to be kept in check. There were all kinds of layers on top of it, regulators and senators were told, and although they had no idea what that meant, they insisted the layers be labelled unlawful too. 

Whereas both sides of the pond could not agree on what a digital asset even was, whether an NFT was a piece of art or a piece of property, whether stablecoins were just sophisticated money or systemic threat, the powers that be were of one mind on that: that Ethererum chain had to be monitored to save the world: from war and pestilence, from dictators and dickheads, from mistakes and malfeasance. It had to be monitored in real time, all things untoward had to be intercepted. The question was how?

Did one have the man power? The woman brain? The child imagination? The wisdom, the wherewithal, to make it happen? Did one even need humans? How could one access this tricky transactions, or even find them in the pile of addresses and the streams of code? The wizard Google was summoned, to create a monitoring system centralized by the most powerful data processing company in the world. (You can now search for ETH transactions with Google Search.) Cybersecurity companies were recruited and acquired (not just by governments, also by the issuers of stablecoins, like Circle. Only thus could crypto creepingly progress, in a straight jacket, kept in check, by taking the deign out of decentralization, by undoing the ideals of self-sovereignty, by negating the promise of ultimate freedom. Because with ultimate freedom (not your keys, not your crypto) came ultimate threats (your keys, your loss!) 

So here we are. 

We wait. 

We wait for the outcome of those studies, although we already know it. It is bound to happen. We are merely biding our time, expecting within months a verdict of presumed guilty until proven innocent. And if not by sheer momentum or brute force of enforcement, then with one more scandal (Just the one, dear), one more illegal incident involving blockchain (That was it!), and at last, Ethereum will lose its independence and lead for the gulag, and as it does, it will self-destruct. We count 8 projects that have already turned their back on Vitalik’s child (and Hoskinson’s stepson). 

The face of crypto has thus changed forever, in that fateful October month, when the men in black screamed “We need to know what’s going on!” 

The road is clear, the goal uncertain, but make no mistake! Ethereum is now an official channel, documented down to the details, the minutiae and the minutes and seconds and milliseconds and block numbers, and for every official channel there must be an official policeman, a judge, and a gaoler. 

And so, in these troubled ides of fall, those momentous (there’s that word again) moments of realization that we can’t let crypto be cryptic, the fate of digital money was decided, and nothing would ever be the same. Unless of course, you moved on, to Cosmos, to Algorand, to Constellation, to Aptos, to Sui, to Phoenix, to Gorgon, to Edgar, to the next and the next and next installment of blockchain or graph, hyper, hash, or otherwise, but there too they would catch up. The dream of anarchic autonomic has been smashed this fall. The extremists will go underground (under-chain?) And for the rest of us? Tradfi meets defi and defi meets tradfi. They will merge. Oh, The Merge. Perhaps it was code all along. We merged not a side chain or a testnet, but accountability, responsibility, with decentralized self-sovereignty. 

And he looked up into the blockchain’s eyes. And all was fine. 

The author is the Head of Research at Uphold. To sign up for the world’s safest web3 bank with full crypto services click here.

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Published by Dr Martin Hiesboeck

Futurist and Policy Advisor for Companies, governments and NGOs on digital future, blockchain and digitization Head of Research at Uphold and CEO of Alpine Blockchain Consultants

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