In-depth Interpretation of ConsenSys Letter to the U.S. Department of the Treasury

This article is from consensys

Compiled by: Moni, Odaily Planet Daily

On August 12 local time, blockchain company ConsenSys Software Inc. sent a letter to the U.S. Department of the Treasury in response to the regulatory agency's request for comments on the responsible development of digital assets.

The letter mentions that decentralized networks like Ethereum enable unprecedented innovation and achievements. Ethereum is the largest programmable blockchain in the world, leading in developer community, user activity, and business adoption. On this trusted open-source foundation, people around the world are building the future digital economy and online communities. ConsenSys's software suite, which includes MetaMask, Infura, Quorum, Truffle, Codefi, and Diligence, is used by millions and supports billions of blockchain calls, enabling developers, businesses, and users worldwide to build next-generation applications, launch modern financial infrastructure, and access decentralized networks.

Here are the main points of the letter:

1. Blockchain as a "Programming Platform"

As understood by the U.S. Department of the Treasury, programmable blockchains like Ethereum allow anyone to write and publish code that can be accessed by others, as long as they can access the blockchain network and are able to write and transmit on-chain transactions. In recent years, there has been significant growth in blockchain software development, with a notable increase in the number of developers solving specific programming problems on platforms like GitHub. According to an analysis released at the end of 2021, there are over 18,000 active developers engaged in blockchain programming projects each month, and more than 34,000 new developers migrated to the blockchain ecosystem in 2021.

MetaMask is recognized as the world's most popular self-custody wallet for Ethereum, but few realize that it is both a developer platform and a client key management solution. ConsenSys is not the only company dedicated to enhancing developer engagement and productivity; there are numerous examples of a thriving developer ecosystem, with bright minds from around the world addressing new challenges posed by emerging technologies.

From this perspective, the U.S. Department of the Treasury should consider regulatory issues surrounding blockchain protocols. So far, there has been significant focus on the prices of dollar-denominated digital tokens and the speculative behavior often accompanying secondary market trading, but sound regulation can only be achieved when the technical capabilities of emerging blockchain networks are well understood.

2. Risks of Blockchain Networks and Related Software

There are certain risks associated with blockchain software (on-chain code and off-chain tools) and participation in the blockchain ecosystem. ConsenSys provides some opinions on how to mitigate these risks, as follows:

• Phishing: MetaMask users become targets of social media and phishing attacks via email, where fraudsters trick users into sharing their wallet passwords, which only the users can possess and protect. Currently, about 80% of all customer complaints received by MetaMask through its customer support channels are reports of phishing attempts. Social media platforms like Twitter are also hotspots for fraudulent activities; posting the term "MetaMask" on Twitter often leads to bots attempting to lure users into sharing their wallet keys, and these platforms have not taken effective measures to reduce fraud.

Solution - First, social media platforms that provide a nurturing ground for fraudsters should invest more time and effort to eliminate such behavior; second, regulatory agencies and law enforcement can collaborate more closely to report, investigate, and dismantle organized large-scale phishing scams. Third, the blockchain ecosystem should create tools to combat online fraud.

• Hackers and Bugs: One risk of on-chain software (i.e., smart contracts) is that it can be exploited by malicious attackers, and there are also potential bug issues that could lead to the loss of user funds.

Solution - First, those building and participating in numerous experimental protocols need to identify the risks they are undertaking; second, as protocols age, the reliable performance record that users can rely on grows longer, but risks do not disappear; third, best practices in software development help reduce the risks of hacking and errors, including third-party code audits before software release.

• Malicious Smart Contracts: Some users of programmable blockchain protocols do not understand that when they interact with smart contracts, they often grant the software permission to send tokens from their wallets to other addresses. This poses a risk to users because while some contracts require users to grant narrowly tailored permissions to utilize their features, others require broad permissions, including control over all tokens in the wallet for any purpose.

Solution - Blockchain developers are currently working to address this issue from the perspective of industry best practices. On one hand, MetaMask is considering solutions that can be integrated into the MetaMask interface to warn users when smart contracts require unrestricted approval of their wallets. Secondly, users' familiarity with the functions and dangers of smart contracts will also reduce this risk, and law enforcement agencies need to understand the risk interactions of on-chain software.

3. Legislative and Regulatory Recommendations

ConsenSys offers four legislative and regulatory recommendations related to cryptocurrency:

First, it is recommended to amend federal tax laws to exempt small cryptocurrency transactions from taxation. The relevant tax laws have become obstacles to the everyday use of cryptocurrency in commercial transactions and other small payments. The bill recently proposed by Senators Toomey and Sinema aims to constructively address this issue, and we encourage the U.S. Department of the Treasury to support these initiatives.

Second, rewards for validating blocks on PoS networks should not be considered taxable income. This is particularly important given Ethereum's transition to PoS and the ongoing growth of other PoS programmable blockchain networks. Without this solution, millions of ordinary Americans may find it difficult to comply with their federal tax obligations in the near future, largely through no fault of their own. The U.S. Department of the Treasury should provide guidance, and the IRS should offer such treatment under current law.

Third, the proposed FinCEN rules regarding non-custodial wallet reporting would impose greater reporting responsibilities or monitoring burdens on wallet users, and the U.S. Department of the Treasury should avoid finalizing any rules aimed at restricting non-custodial digital asset wallets or otherwise legally used wallets. Furthermore, wallets are mechanisms for users not only to hold, send, and receive virtual currencies. They are increasingly becoming mechanisms for users to control their digital identities, participate in DAOs, and engage in business activities that do not pose any risks of money laundering or terrorist financing. Particularly regarding digital identity, many ordinary people will soon use Ethereum accounts as identity logins for online applications, undermining the freedom, privacy, and usability of non-custodial wallets, which runs counter to the goals of technological innovation.

Fourth, the U.S. Department of the Treasury should advocate for legal amendments allowing U.S. government employees participating in blockchain decision-making to hold a certain amount of digital assets. ConsenSys respectfully suggests that the U.S. Department of the Treasury promote regulatory updates to correct the constraints of minimal exemptions for digital assets and support legislative processes to rectify related policy deficiencies.

Conclusion

Despite the growing everyday use cases for blockchain, new phenomena such as NFTs, on-chain digital identities, and decentralized autonomous organizations are still in the early stages of development. As programming experiments continue to innovate on these concepts, it is expected that more users will enter the ecosystem to explore digital ownership, provable privacy digital identities, and new community-based methods of organization, decision-making, and action.

In promoting the adoption of new technologies, the U.S. Department of the Treasury and government agencies and policymakers around the world also play a vital role. However, as with the internet, new technologies require time for potential users to be willing and able to use them. Usability and broader practicality will certainly spark greater interest among ordinary people in blockchain systems, but all of this takes time.