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With the advent of readily available artificial intelligence (AI) applications such as ChatGPT, we are ushering in a new era of rapid improvements in blockchain-based smart contracts. This convergence of innovative technologies will transform industries and pave the way for unprecedented levels of contract development, automation and efficiency.Blockchains decentralized ledger technology powering cryptocurrencies like Bitcoin and Ethereum has gained widespread attention for its unparalleled ability to promote transparency and trust among network participants. Simultaneously, AI has made incredible strides in natural language processing (NLP), machine learning (ML) and data analysis. When these two titans collide, they hold the potential to radically change smart contract execution and enhance blockchain network functionality. By nature, blockchain networks are decentralized, ensuring no single point of control or failure. While decentralization bolsters security, it also presents many scalability and efficiency challenges. Enter AI ready to optimize data processing and storage on the blockchain. One notable limitation of blockchain technology is its sluggish transaction speed compared to traditional payment systems. AI algorithms can come to the rescue by predicting and prioritizing transaction processing, enabling faster confirmation times and a seamless user experience.

Full commentary : AI meets blockchain: Revolutionizing smart contracts and cryptocurrency.

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AI meets blockchain: Revolutionizing smart contracts and ... - OODA Loop

Earlier this month, the U.S. Department of the Treasury (Treasury) released itsIllicit Finance Risk Assessmentof Decentralized Finance (Assessment). This Assessment, part of a broad regulatory scrutiny of entities that operate in the Decentralized Finance (DeFi) space (see the explanation below), focuses on the illicit finance risks associated with virtual assets.

While the assessment discusses how bad actors are taking advantage of weak points in anti-money laundering (AML) and other regulatory regimes across the world, we want to highlight the assessments findings that DeFi companies are often failing in meeting their obligations to address sanctions and money laundering risks. As weve highlighted over the past year, financial institutions of all kinds, from traditional banks and broker dealers to newer crypto and web3 companies are facing increased regulatory scrutiny (for example, see Wilson Sonsinis past alerts onCoinbase,TornadoCash, andKraken). This Assessment serves as a reminder, especially for DeFi financial institutions, that regulators will continue enforcement against AML infractions.

The first-of-its-kind risk assessment alleges that DeFi service providers often fail to institute robust AML compliance programs. This, according to the Assessment, can make DeFi services vulnerable to exploitation by illicit actors. To curb the use of DeFi services for criminal activity, Treasurys Assessment recommends that the U.S. government strengthen AML regulatory supervision, consider potential enhancements to the existing regulatory regime, and better engage with the private sector to stay up to date on the latest developments in the DeFi ecosystem.

De-What?

While there is no universally accepted definition of DeFi services, the term is generally used to describe virtual currency protocols and services that offer some form of automated peer-to-peer exchange transactions. Such transactions are often executed using smart contracts or computer code. DeFi companies can operate, at least to some extent, without the support of a central company, group, or person, though Treasury clarifies that the degree to which a purported Defi service is in reality decentralized is a matter of facts and circumstances. Examples include cryptocurrency exchanges and decentralized liquidity platforms, where lenders and borrowers are incentivized to rely on a particular service.

Decentralization May Not Mean No Regulatory Scrutiny

Treasurys Assessment clarifies that just because a virtual currency business claims to be decentralized does not necessarily mean the business wouldnt be considered a financial institution under the Bank Secrecy Act, the legislative underpinning for AML regulations. Likewise, the declaration that a service is decentralized cannot be used to abdicate responsibility for compliance with sanctions programs administered by the Office of Foreign Assets Control (OFAC).

The Assessment notes that when entities whose operations are subject to regulation (e.g., money transmitters) fail to register with regulators or fall short of their AML obligations, bad actors are more likely to take advantage of their services to either profit from their criminal activity or circumvent law enforcement.

Weve Said It Before and Well Say It Again: Increasing Trend of Regulatory Enforcement

The Assessment is part of a larger trend: regulators are increasingly concerned about the illicit use of crypto assets and will aggressively scrutinize crypto asset businesses. Even businesses with some degree of decentralization are not exempt from this scrutiny.

We have already discussed, for example, how crypto asset exchangeCoinbaseand its $50 million settlement with the New York Department of Financial Services after it failed to track, monitor, and report suspicious activity that may have, and in some cases did, result in illicit activity. Further, decentralized crypto asset mixerTornadoCashwas penalized by OFAC in August 2022 because, according to OFAC, TornadoCashs weak AML program allowed users to launder over $7 billion. On the same day, a top employee at BitMEX was found guilty of violating AML regulations issued pursuant to the Bank Secrecy Act, demonstrating that individuals, and not just crypto asset companies themselves, can be held liable for such violations. Crypto asset exchangesKrakenandBittrexboth settled with federal regulators in 2022 because of alleged sanctions and AML violations.

The Treasurys Assessment separately notes that the Commodity Futures Trading Commission has even brought anactionagainst a decentralized autonomous organization (DAO) for failing to comply with KYC/AML requirements. The U.S. District Court for the Northern District of Californiaheldthat the DAO could be sued as an unincorporated association under applicable law, demonstrating how decentralization does not make crypto services enforcement-proof. Regulators are unlikely to take their eyes off DeFi crypto asset businesses anytime soon, making proper compliance programs more important than ever.

My Company Works in DeFi: What Should I Do?

First and foremost, companies operating in the DeFi space should perform an analysis to determine if they should register with any federal (and/or state) regulatory bodies (e.g., FinCEN). Just as in the TV series The Office, when the character Michael Scott found that declaring bankruptcy required a bit more legwork than making that statement in a public place (even loudly), DeFi companies (and their employees) should not assume that simply telling partners and customers they are decentralized will shield them from their regulatory responsibilities.

Additionally, maintaining an effective AML and sanctions compliance program is crucial to avoiding missteps that could expose DeFi companies to significant penalties. DeFi companies that dont have such compliance programs in place should consider whether they are required to have one, what it should include, and how should it be resourced.

Lastly, Treasurys Assessment includes an acknowledgment that the government is behind in understanding DeFi, and Treasury recommends additional engagement with industry to get up to speed. This engagement may come through public comment and research opportunities. DeFi businesses should pay close attention to these opportunities to ensure they are helping shape the governments understanding of this evolving and innovative space.

If you have any questions about the Assessment, or how we can help your DeFi company, please reach out to any member of Wilson Sonsinis national security and/or fintech and financial services practices.

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Treasury Risk Assessment Emphasizes That Decentralized Crypto ... - Wilson Sonsini Goodrich & Rosati

In the next few months bitcoin (BTC) may be able to reclaim much of the attention it has relinquished to other crypto tokens and projects during recent years and the enthusiasm it lost during the crypto winter, German investment bank Berenberg said in a research report Thursday.

As U.S. regulators crack down on the industry, almost every token appears at risk of being branded a security and becoming subject to an enforcement action, the report said.

The sole exception is bitcoin, which, by virtue of the decentralization stemming from the design of its blockchain protocol, the Securities and Exchange Commission and other regulators characterize as a commodity rather than a security, analyst Mark Palmer wrote.

The bank sees bitcoins price appreciation in the last few months as a sign that more investors are recognizing it as a sensible alternative not only among crypto tokens, but also within a global financial context.

The recent banking crisis in the U.S. and concerns over the Federal Reserves interest-rate policies have led some countries to reduce their exposure to the U.S. dollar, which has fueled concerns about de-dollarization, the note said, and could help to highlight bitcoins value proposition. De-dollarization is the decline of the greenbacks dominance as the worlds global reserve currency.

The fourth bitcoin halving date, scheduled for May 2024, is another potential positive catalyst for the cryptocurrency, the report said, noting that if history is any guide, then bitcoin could rally ahead of and after this much-anticipated halving.

The utility of the Bitcoin blockchain has been highlighted by the increasing traction gained by the Lightning Network, the report added. The Lightning Network creates a layer on top of the Bitcoin blockchain exploiting user-generated micropayment channels to conduct transactions more efficiently.

Read more: Bitcoin Market Impact From Mt. Gox Repayments Will be Limited: Matrixport

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Bitcoin Is Poised to Reclaim Cryptos Spotlight: Berenberg - Yahoo Finance

Decentralized networks are becoming commonplace on today's technical landscape, as enterprises seek to write custom applications that solve business problems. Increasingly these are based on smart contracts -- structured programming logic that executes on a blockchain running on a decentralized network. Smart contracts and blockchain are applicable to a wide variety of commercial sectors including agriculture, finance, real estate and industrial manufacturing.

This article covers the basic principle of decentralization: what it is, how it works and how it's used to manage applications such as blockchain-based smart contracts.

Let's start with understanding the difference between centralization and decentralization.

In a centralized network, a central authority decides what data can be stored on the network and grants varying levels of access to that data.

An easy way to conceptualize a centralized network is to envision a bank that keeps all its applications and data on a private network. Customers who open accounts at a bank provide a username and password pair, along with personal information. The bank stores all of that in a database hosted on its private network.

The bank implements many restrictions to access the applications and data on its network. Customers provide their username and password to access and work with applications and data, but they can only access what the bank has granted permissions for. They cannot view the data of other customers, nor access applications or data reserved for bank personnel, such as for loan processing. No bank allows just anybody audit its books; auditors must be authorized by someone in charge. However, banks might allow the general public to access and view certain data, such as information applicable to advertising or for support purposes.

Everything is subject to the bank's central authority, which decides what data can be stored on the network and grants a certain degree of trust and permission to a given user.

Decentralized computing is an architectural style in which there is no central point of authority to control access to data or logic that resides within a network. Instead, authority is determined according to algorithms shared by all computers, or nodes, that are part of the network.

Decentralized networks work on a peer-to-peer basis. Each computer or node on the network has an exact copy of all of the network's data and applications, and if one receives additional data, it passes that data on to the other nodes on the network.

Imagine a network of computers, each of which has only a particular text editor and a collection of the same text documents. Anybody could use any computer on that network and have the same computing experience, meaning that they can read any text document in the collection using the installed text editor.

Let's say someone using one of those computers creates a new document with the installed text editor and saves it to the local disk. Then the computer sends the saved document to all the other computers on the network. Furthermore, when a computer on the network receives a new document, it does two things:

The result is that all computers on the network are in the same state in terms of applications (the text editor) and data (the collection of documents), unless and until a new document is introduced to the network.

This is essentially how decentralization works. There is no single central authority that decides what data can be stored on the network and that grants access to applications and data on the network. Instead, all the computers on the network have the same data and applications, and their data and application configurations are identical. Anybody can audit the data on the network.

Decentralization is the principle that makes blockchain and smart contracts work.

As its name implies, blockchain stores data in immutable blocks that are chained together in sequence. Each additional block in the chain is represented by a hash that describes the content in the current block under construction, as well as all of the content in every preceding block in the chain. This process ensures that data is correct throughout the chain, with each additional block, and preserves the blockchain's data integrity.

Blockchains treat each new block the same, much like the text editor/document scenario described above. New blocks are sent to all other computers on the network, which add the new block to their instance of the blockchain. Every computer on the blockchain network has an identical copy of the blockchain data. Thus, the blockchain network is decentralized. If one computer on the network stops working, it doesn't matter because other computers on the network have the same data and the same computing algorithms.

Industrial-strength decentralized networks first emerged with cryptocurrencies. Cryptocurrencies are not operated by any single entity; no central bank creates the money. Probably the most well-known cryptocurrency around is Bitcoin, created in 2009, which uses blockchain technology as its data storage mechanism.

Tools such as Blockchain Explorer let you see the movement of Bitcoin from one account to another through its decentralized network, as well as view the transaction behavior on other cryptocurrency networks. The private banking industry has no analogous tool to provide such visibility -- nor would it ever publish one.

There are a lot more details in decentralization architecture that sync the blockchain among all the computers on the network and also make it difficult for nefarious actors to counterfeit cryptocurrency or steal cryptocurrency from user accounts. The important thing to understand about Bitcoin and other cryptocurrencies is that they operate on decentralized networks. No one computer or agent is in charge of the blockchain.

Despite recent turmoil -- the failure of the FTX exchange and the sagging value of popular cryptocurrencies such as Bitcoin and Ether, for example -- conservative estimates indicate the overall cryptocurrency market is around $1 trillion. Even if half of that money disappeared tomorrow, what remains would still exceed the GDP of Austria. Cryptocurrency is here to stay, and it has proven the value of decentralization.

A major consideration with decentralized networks is security, particularly around user identity. Centralized control means a single security authority, but decentralization throws that model out the window. Companies that rely on smart contracts need to trust in the legitimacy of the blockchain. Those that support cryptocurrencies don't want to be put in a position where they support criminal activities such as money laundering.

A user is typically represented in a cryptocurrency network by an account identifier -- i.e., a unique value expressed as an alphanumeric string.

An account identifier is bound to a digital component called a wallet. Information about the holder of the wallet, such as name, email and other access credentials, is private to the wallet. All user information in a wallet is stored on a local machine, not in a private network or somewhere in the cloud. A wallet might be bound to a variety of cryptocurrency networks, but that information is private to the user, as is their identity information.

However, there are situations that require more information known about a user beyond the account identifier. The decentralized identity model, also known as self-sovereign identity, is sponsored by the World Wide Web Consortium to address sharing personal information in a decentralized manner. Under decentralized identity, users own their identity information and share portions or all of it. No central authority grants access to a user's information, such as how Google's sign-in provides user verification via OAuth. Instead, users store their identity information in a decentralized, encrypted manner, and when an identity must be verified, the user decides which piece of information to share with a particular network.

Programs such as the decentralized identity model are still evolving. The important thing to understand is that decentralization and private identity management are crucial to run decentralized networks.

When the internet first appeared on desktop computers, many viewed it as merely a better way to send email and a novel way to view cat pictures. Today, the internet is at the center of all social and commercial activity.

The potential of decentralized networking and blockchain technology -- as represented in various initiatives deemed Web3 -- have the same potential. As more companies adopt smart contracts and support cryptocurrencies in their day-to-day activities, they will explore new novel ways to use these technologies.

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Smart contracts, blockchain and decentralized computing - TheServerSide.com

With the U.N.s special representative of the secretary-general for Libya, Abdoulaye Bathily, recently announcing a new initiative to hold elections, it is critical to consider the undercurrents beyond electoral processes that must be navigated, the roles of national Libyan institutions in mitigating the countrys intense polarization, and how the international community can help.

The complexity of Libyas conflict with rival governments in the east and west, various players jockeying for power and a host of foreign actors interfering has resulted in everchanging fault lines and flash points for violence. The U.N.-backed Government of National Accord based in Tripoli (the west) and the Tobruk-based House of Representatives (the east) both grapple with the limits of power in a country with divided governance and struggle to execute the basic functions of a state.

These broader national tensions are exacerbated by regional and local conflicts among various tribes and armed groups and narratives of marginalization especially in the countrys southern Fezzan region that foster grievances and resentment. This convoluted interplay generates a self-perpetuating cycle of conflict and violence.

What makes this worse is the role of the numerous foreign powers who interfere in Libya to advance their own interests. The relentless involvement of countries like Russia, Turkey, the United Arab Emirates, Egypt and France in supporting various factions has transformed the conflict into a convoluted proxy war. These powers driven by strategic, economic and geopolitical motivations exacerbate the situation by supplying weapons, financial aid and even mercenaries to their respective Libyan allies. As a result, the quest for peace and stability has become ever more elusive, leaving the Libyan people to bear the brunt of a conflict that seems to have no end in sight.

These are issues that elections no matter how credible and transparent cannot overcome alone. Libyas rival factions need to come together and agree on a political settlement that addresses the root causes of the conflict. This settlement should provide a framework for the division of power and resources and a plan for decentralizing power. Promoting reconciliation to redress grievances and injustices is also imperative. These are processes that will take time, concerted effort and political will. To even begin to set Libya on a path to a peaceful and stable future, it is vital to build trust among Libyans and enhance the legitimacy of national institutions.

The U.N.-facilitated Libyan Political Dialogue Forum which was launched in 2020 and brings together key Libyan representatives from across Libyan society mandated in February 2021 that Libyas Presidential Council oversee vital national reconciliation efforts. Established under the Libyan Political Agreement in 2015, the Presidential Council serves as Libya's head of state, led by a chairman and two vice-chairmen representing Libyas three historical regions.

In February 2023, the Presidential Council convened a national dialogue with over 80 representatives from diverse Libyan factions. They identified five issues that must be addressed to achieve national reconciliation: identity, security, transitional justice, decentralization and local governance. The deputy head of Libyas Presidential Council, Abdullah Al-Lafi, has said that this effort can complement the U.N.s latest elections plan and U.N. Special Representative Bathily has expressed his support for the Libyan-led endeavor.

At the request of the Presidential Council, Libyas National Planning Council (NPC) has played an instrumental role in designing the national dialogue. Beginning in 2018, the NPC spearheaded reunification efforts for state institutions divided since 2014 between the east and west. Its achievements include the reunification of the Audit Bureau and Libyan Airlines, among other national institutions.

These efforts to reunite divided institutions emphasized that reunification hinges on reform and a substantial conversation about decentralization. Decentralization-focused discussions are especially critical to the national reconciliation process, and their importance to the reunification efforts offers a window into how Libyas governance system can be reformed to align institutions with international norms and adapt their mandates to satisfy Libyan expectations.

Given the technical complexities of decentralizing governance and devolving it to subnational bodies, national institutions that understand the intricacies and necessary mechanisms should be entrusted with this process. These institutions will create and refine a national vision, which will subsequently be presented to the Libyan people for their input and evaluation. In this way, both reconciliation and decentralization work together in a complementary fashion, with the NPC playing a pivotal role in bridging the two tracks.

While the Presidential Councils and the NPC's initiatives are promising, they reveal structural weaknesses that require international support. The primary shortcomings stem from inadequacies in the design of the procedures. For instance, it is imperative to devote more attention to establishing a strong participant selection criterion, promoting inclusiveness for local communities and effectively connecting local and national processes. Additionally, there are areas for improvement in strategic communications and related aspects.

To bolster these efforts and the capacities of the Presidential Council and the NPC, the international community must marshal expertise and provide technical assistance, without compromising the Libyan-owned processes. This support should aim to strengthen national institutions, foster dialogue and cooperation among rival factions, and advance initiatives that tackle the conflict's root causes.

Ending Libya's political impasse requires a holistic strategy, of which elections are only one component. Tackling underlying conflict drivers and bolstering the Presidential Councils and the NPC's efforts to overcome polarization are critical steps toward achieving a durable peace. The international community can play a pivotal role by providing resources and expertise. In the end, though, Libyans themselves will have to forge a path to peace.

Mehdi Bchir is the country director for the U.S. Institute of Peace in Libya.

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Beyond Elections: Libya Needs Unified Institutions and Reconciliation - United States Institute of Peace