The G20 group of nations has reaffirmed it will align with standards for anti-money laundering (AML) and countering the funding of terrorism (CTF) set to be finalized by the Financial Action Task Force (FATF) this month.

Finance ministers and central bank governors from the G20, who met in Fukoka, Japan, over the weekend, made the commitment to applying the rules in a communique published on the website of the Japanese Ministry of Finance on Sunday.

The FATF standards are expected to set tough operating procedures for crypto exchanges, going beyond the basic “know your customer” (KYC) rules that most major exchanges now abide by. In addition to verifying and keeping records of their users’ identities, exchanges and other service providers would have to pass customer information to each other when transferring funds, just as banks are required to do – a procedure known in the U.S. as the “travel rule.”

Blockchain analysis firm Chainalysis recently argued that the expected changes, as set out in a draft document in February, would be unrealistic and harmful for the crypto industry.

The G20, however considers the threat from crypto assets low, and recognizes their potential. The group said in the communique:

“Technological innovations, including those underlying crypto-assets, can deliver significant benefits to the financial system and the broader economy. While crypto-assets do not pose a threat to global financial stability at this point, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering (AML) and countering the financing of terrorism (CFT). “

It’s also seeking possible additional measures, calling for the Financial Stability Board (FSB) and “other standard setting bodies to monitor risks and consider work on additional multilateral responses as needed.” The G20 welcomed the FSB’s directory of crypto-asset regulators, published in April, and its report on ongoing work, regulatory approaches and potential “gaps” in crypto-asset regulation.

Finally, addressing the issue of hacks in the crypto space, the G20 said:

“We also continue to step up efforts to enhance cyber resilience, and welcome progress on the FSB’s initiative to identify effective practices for response to and recovery from cyber incidents.”

Japanese flag image via Shutterstock

Cryptocurrency miners in Iran could face higher electricity bills if Iran’s Energy Minister gets his way.

On Sunday The Financial Tribune quoted minister Homayoun Haeri as saying that energy used by cryptocurrency miners in Iran should be charged in real prices and not be subsidized by the government.

Iran’s government spends about $1 billion in electricity subsidies in the country with Iranian households paying just a fraction of the real cost of the electricity usage.

Authorities in Iran prohibit the mining and trading of cryptocurrencies. However, such activities continue to proliferate given the relatively low electricity costs in the country.

Sanctions imposed by the US on Iran has even encouraged more people in Iran to mine and trade cryptocurrencies as an alternative to fiat currency.

In an earlier report by CoinDesk, blockchain researcher Nima Dehqan at Tehran-based crypto startup Areatak said foreign investors from Spain, Ukraine, Armenia, and France have visited their cryptocurrency farms in Iran. Dehqan said his firm has already entered an agreement with an investor from Spain to establish a mining farm in Iran.

Dehqan said foreign cryptocurrency investors are keen on farming in Iran due to the cheap electricity in the country which costs well below $0.01 per kilowatt-hour. Further adding to Iran’s appeal to cryptocurrency miners is the recent fall of the Iranian rial’s value due to sanctions imposed by the US, according to Dehqan.

Image via Shutterstock.

The mobile bitcoin wallet project Samourai Wallet is partnering with the French hardware retailer Nodl to create a bitcoin node device that syncs with Samourai’s privacy-centric mobile wallet.

Revealed exclusively to CoinDesk, Nodl co-founder Michel Luczak said this new product will be a “full, self-validating, bitcoin and lightning node” that allows people to use the mobile wallet app without relying on Samouri Wallet’s servers. This has long been a point of contention, as critics argue the wallet’s privacy features are insufficient if users’ transaction data is stored on a centralized server anyway.

The new node devices will be available this year, the Samourai Wallet team told CoinDesk. Plus, Nodl node owners will be able to update their devices to add Samourai Wallet’s Dojo software. This software will include a feature called Whirlpool, which batches bitcoin transactions together across wallets in order to obfuscate the source of funds.

“In addition to Dojo being preloaded onto Nodl devices we will also be preloading Whirlpool desktop mixing, allowing users to access and manage their Samourai Wallet mixing on their desktop,” the Samourai team told CoinDesk.

The partnership comes as Nodl sales see an uptick, according to Luczak, expecting to sell roughly 500 devices in 2019 if the current trajectory continues.

“For the first time you’ll have a one-click install mixing service that’s available to anyone,” Luczak said.

Earlier this month, the company behind Samourai, Katana Cryptographic, announced its first venture funding round: a $100,000 investment from Cypherpunk Holdings.

Samurai sword image via Shutterstock

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.

Advances in cryptography are converging to help developers bring blockchain applications closer to the core decentralizing principles on which this technology is founded.

Inventions such as atomic swaps, zk-SNARKS and Lightning-based smart contracts are allowing developers to realize the dream of true peer-to-peer transactions in which neither party, nor an outside intermediary, can act maliciously. Witness the rising number of non-custodial and decentralized exchange (DEX) services for trading crypto assets.

This is exciting. But it also shines a light on another big problem that has curtailed the widespread adoption of cryptocurrency and blockchain technology: secure key management.

For too long, the most reliable means of protecting the private keys that afford the holder control over an underlying crypto asset have been too clunky, insufficiently versatile, or difficult to implement on scale. User experience has been sacrificed in return for security.

Now, some big strides in another hugely important field of cryptography – secure multiparty computation, or MPC – point to a potential Holy Grail situation of both usability and security in a decentralized system.

A keyless wallet

Progress in this field was marked last week by Tel Aviv-based KZen’s public announcement of the specs for its new ZenGo wallet. ZenGo uses MPC, along with other sophisticated cryptographic tools such as zero-knowledge proofs and threshold cryptography, to share signing responsibility for a particular cryptocurrency address among a group of otherwise non-trusting entities.

The beauty of the KZen model is that security is no longer a function of one or more entities maintaining total control over a distinct private key of their own – the core point of vulnerability in cryptocurrency management until now. Instead the key is collectively derived from individual fragments which are separately generated by multiple, non-trusting computers.

The model draws on the genius of MPC cryptography.

With this approach, multiple non-trusting computers can each conduct computation on their own unique fragments of a larger data set to collectively produce a desired common outcome without any one node knowing the details of the others’ fragments.

The private key that executes the transaction is thus a collectively generated value; at no point is a single, vulnerable computer responsible for an actual key. (KZen’s site includes a useful explainer on how it all works.)

KZen is not the only provider of MPC solutions for blockchain key management. Unbound, another Israeli company, is going after the enterprise marketplace with its MPC solutions for crypto security.

Unbound’s prolific (if blatantly pro-MPC) blog offers different angles on the same argument.

It makes a repeated case for why MPC is superior to the two preferred approaches to crypto security of the moment: hardware security modules (HSM), on which hardware wallets like Ledger and Trezor are built, and multi-signature (multisig) technologies, which are favored by exchanges.

Attacking the trade-offs

If KZen and Unbound are to be believed, MPC solutions resolve both the hot-versus-cold trade-off in key management and the dilemma of self-versus-managed custody.

Cold wallets, in which keys are stored in an entirely offline environment out of attackers’ reach, are quite secure so long as they remain in that offline state. (Though you really don’t want to lose that piece of paper on which you printed out your private key.)

But bringing them into a transactable, online environment poses an overly cumbersome challenge when you want to use those keys to send money. That’s perhaps not a problem if you’re just a HODLer who transacts rarely but it’s a serious limitation to blockchain technology’s prospects for transforming overall global commerce.

On the other hand, hot wallets have, until now, been notoriously vulnerable.

Whether it’s the relentless “SIM jack” attacks on people’s phones that are emptying out both hosted (third-party custodial) wallets and on-phone self-custody holdings, retail participants’ horror stories are legion. And, of course, we all know the stories of custodial exchanges being hacked – from Japan, to Hong Kong, to Canada, to  Malta.

At the same time, the solution that regulated institutional investors are currently seeking – that custodians and exchanges build Fort Knox-like “military-grade” custody solutions  – inherently contain a compromise.

Not only does this approach fail to resolve the dependence on a third-party, but there are serious doubts about whether any such solution can be forever safe from hackers, who are constantly improving their methods for getting over firewalls. In best-case scenarios, the constant IT upgrades becomes a massive money suck.

Alternative to HSMs and multisig

None of this is not to say that existing security technologies are useless.

Ledger and Trezor’s hardware devices – a more nimble form of cold wallet – are widely used by individuals who are uncomfortable with both external third-party custody and online, on-device self-custody wallets. And, separately, multi-signature (multisig) solutions, in which an m-of-n quorum of keys are required to execute a transaction, have proven robust enough to be used by most exchanges.

But in both cases, vulnerabilities have been exposed. And to a large extent those risks come down to the fact that, regardless of the surrounding security model’s sophistication, the all-important keys are always sitting at single points of failure.

Just last week, researchers demonstrated how they could hack into a remote hardware security module. The irony: the researchers were from Ledger, which relies on HSM to secure its customers’ keys.

Multisig models arguably offer protections across such attacks, because a breach requires simultaneous control of more than one key held in separate locations, but the fact is that multisig solutions have also failed because of both technical and human vulnerabilities (inside jobs).

What’s more, both solutions are inherently limited by the need to customize them to particular specifications or ledgers. Crypto developer Christopher Allen pointed out last week , for example, that HSMs are particularly constrained by the fact that they are defined by government standards.

And in each case, the ledger-specific design of the underlying cryptography means there is no support for the kind of multi-asset wallets that will be needed in a decentralized interoperable world of cross-chain transactions.

By contrast, KZen is boasting that its key-less wallet will be a multi-ledger application from day one.

Challenges and opportunities

To be sure, MPC remains unproven in a practical sense.

For some time, the heavy resources needed to carry out these network computing functions made it a challenging, costly concept to bring into real-world environments. But rapid technical improvements in recent years have made this sophisticated technology a viable option for all kinds of distributed computing environments where trust is an issue.

And key management isn’t its only application for blockchains, either. MPC technology plays a vital role in MIT-founded startup Enigma’s work on “secret contracts” as part of its sweeping plan to build the “privacy layer for the decentralized web.”

(An aside: Enigma CEO and founder, Guy Zyskind, is also an Israeli. Israel has fostered a remarkable concentration of cryptographic expertise in this space.)

It would be unwise to assume that MPC, or any technology for that matter, will provide a perfect, totally infallible solution to security problems. It is always true that the biggest security threats come when human beings complacently believe security is not a threat.

However, if you squint hard enough, and think about how this technology’s prospects for better key management can be married to Enigma’s vision for an MPC-based secret contract layer and to the broader march toward decentralized, interoperable asset exchanges, a compelling vision of true peer-to-peer blockchain-based commerce starts to emerge.

At the very least, you need to watch this space.

Keys image via Shutterstock

Noelle Acheson is a veteran of company analysis and a member of CoinDesk’s product team. The opinions expressed in this article are the author’s own.

The following article originally appeared in Institutional Crypto by CoinDesk, a free newsletter for institutional investors interested in cryptoassets, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.

In nature, fast is better than slow. Being able to outrun your predator increases your chances of survival, as does being able to outrun your prey. So, evolution does its thing and we emerge hardwired into believing that speed is a prerequisite to success.

This sentiment has spilled over into financial markets. Speed is associated with competitive advantage and additional profits. Just ask any high-frequency trader.

It also reared its head at a recent security token event in London, a small but compelling gathering with entrepreneurs, investors and traditional finance representatives debating what form this new type of asset will take.

One of the exercises was to split participants up into groups and rank the supposed benefits of security tokens. We were given a list of outcomes to choose from, which included liquidity, operational efficiency, transparency, innovation and many others. The lack of a clear consensus was unsurprising, given the diversity of the participants (much like the sector itself). What was surprising, however, was the number that insisted the main benefit was “speed.”

This was surprising, as it is based on three assumptions:

1)     That speed is desirable

2)     That blockchains confer speed

3)     That it is a technology issue.

All of these assumptions, however, are mistaken.

Speed is not a priority

First, let’s look at why we think faster transactions would be desirable.

The main reason is risk reduction. The longer a trade takes to settle, the greater the risk that the buyer will default on its payment commitment. In capital markets, things can happen fast, and an investor who wanted to purchase an asset on Tuesday could be out of funds (or hacked, or have its accounts frozen) by Wednesday.

Traditional markets usually get around this problem with a Central Clearing Party (CCP), which steps in to buy and sell from each participant in the trade in its own name and with its own funds. Yet this adds costs and middlemen to the system, and there is still the (remote) risk that the CCP will disappear, leaving trades half complete.

Security token markets do not yet have a CCP figure. Maybe one will emerge as the market matures, adding further liquidity and reliability. Meanwhile, in crypto assets, lack of a fast trade cycle adds risk.

Faster transactions would also be desirable, in theory, because cash could be used more efficiently — but this is only partially true. If I am the seller and you are the buyer, I would like the cash sooner rather than later, thank you. The sooner I can invest it for a return or use it to meet payments, the better. You, on the other hand, would rather give it to me later, since you probably have it parked somewhere earning interest. Or, maybe you need to sell an asset to raise the cash that you need to give to me.

For the instant settlement that blockchain tech promises, you would need to have funds deposited at the relevant exchange or broker. Even if you do get a return on that (a big “if”), it will be much lower than you could get elsewhere. And if you’re managing money on behalf of others, that’s unlikely to be acceptable.

And, what if I am the owner of the asset, but don’t actually have it on me? Maybe I’ve lent it out to a short-seller or used it for collateral. It might take me a bit of time to unwind that commitment to be able to transfer it to you. The requirement to have it on hand for immediate settlement could curb the growth of lending and collateralization, which would preclude the emergence of a sophisticated market.

To highlight the point, a few years ago the Moscow stock exchange moved from same-day to two-day settlement, in what was touted as a “modernization.”

So, speed in settlement may reduce risk, but it adds a degree of inefficiency.

Blockchains are not fast

Now let’s look at the misconception that a blockchain-based transaction would be faster than one on traditional rails.

Blockchains are much slower than centralized databases. The technology involves validation of a transfer by the entire network, and, depending on the relevant blockchain’s consensus algorithm, could take somewhere between a few seconds and some minutes.

Even private blockchains, which do not have the same consensus considerations, have some degree of latency.

On the other hand, trades on traditional markets take nanoseconds.

Settlement is not faster, either. Last week the Bundesbank released the results of a series of trials it performed with Deutsche Borse which tested blockchain technology vs traditional rails in financial settlement. The blockchain-based system lost in terms of speed and cost.

Technology is not the problem

But, of course, blockchain-based settlement must be faster than traditional settlement – blockchain cuts out middlemen, right? Fewer steps should mean faster transfers of assets and payment.

Perhaps, but the number of steps and middlemen is not a technology issue. It’s about processes, and they evolve over time in response to problems and circumstances. Moving to a blockchain-based transfer and settlement system will not necessarily solve these problems. As we saw earlier, instant settlement is not always desirable.

So, expecting a new type of asset to “solve” a problem that isn’t really there, with technology that isn’t faster, is placing unrealistic expectations on an emerging concept.

And unrealistic expectations will not help these new assets find their market.

What is needed?

What that market will look like is still unclear. What is clear is the sector’s rapid evolution and its potential to help reform capital markets through the spread of blockchain-based assets and settlement.

For that to materialize, however, several things need to happen:

All of the above is likely, but even once in place, there is no guarantee that security tokens will trade and settle faster than traditional assets.

Unlike in nature, the evolution of financial markets has shown us that speed is not always in our interests.

In finance, efficiency and resilience are more important than “winning” – just ask the tortoise and the hare.

Cars speeding on freeway image via Shutterstock