Legal issues

Exploring the Edges of Blockchain Technology: A Deep Dive into MEV and Oracles

In the dynamic world of blockchain technology, a Research Note from authors at the Financial Conduct Authority (FCA) and University College London (UCL) delves into the complex territories of Maximal Extractable Value (MEV) and blockchain oracles, presenting a nuanced study that underscores both the potential and the pitfalls of these advanced concepts in cryptoasset services and Decentralised Finance (DeFi).

At the heart of this exploration lies MEV, a concept that thrives on the transparency and ordering of transactions within blockchain networks. While it heralds a new era of value extraction, it also opens the door to strategies that may skirt the ethical line, raising concerns over market fairness and the integrity of transactional processes. From the beneficial arbitrage opportunities to the controversial practices of front-running and sandwich attacks, MEV presents a multifaceted phenomenon that demands a keen understanding of its implications.

Equally significant are blockchain oracles, pivotal in bridging the on-chain and off-chain worlds. These conduits of information are indispensable for the seamless operation of smart contracts, yet they bear vulnerabilities that can be exploited, casting a shadow over their reliability. The study highlights the delicate balance that must be struck in the design and implementation of oracles, stressing the importance of robust data sources, decentralisation, and innovative solutions to mitigate risks.

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A Regulatory “Trial and Error” Phase Shaping the Cryptocurrency Ecosystem

In general, the broad aim of regulation is to organise the relationship between persons and to protect their rights and interests in society. However as we have discovered, this has not been the case within the cryptocurrency space.

It has been almost 15 years since Satoshi Nakamoto published the Bitcoin whitepaper. Since then, this seminal document posted on a mailing list, catalysed the emergence of an entirely new-transnational field. Considering the substantial time that has passed and the widespread popularity of cryptocurrencies, one would expect regulators to have at least figured out ‘how’ and ‘what’ to regulate, right? But it appears not so. Regulators do not seem to want to provide long-term, serious solutions, but rather a collection of outdated bandages of reactions that mostly portray the illusion of a solution, with not-so-hidden intentions in mind.

The cryptocurrency ecosystem itself has often been compared to the Wild West. Nevertheless, this also applies to its journey to be regulated. A journey full of ill-suited regulatory approaches that resulted in a plethora of dilemmas. We explore this tension between the technology and regulation in our latest paper “Shaping Cryptocurrency Gatekeepers with a Regulatory ‘Trial and Error’”, with a primary focus on the Financial Action Task Force’s recommendations, and the EU’s 5th Anti-Money Laundering Directive.

Historically speaking, it was only after the rising popularity of the Silk Road and the collapse of the most popular (at the time) exchange Mt. Gox, that regulators realised that they needed to take action. The advertised main objective here is the curbing of criminal activity and providing regulatory protection to consumers/users. However, until only recently, most of the regulatory steps taken by most regulators choosing to act, were approaches mainly targeting money laundering and terrorist financing, with other limited initiatives here and there. Whilst this approach might have had some potential benefits, it was not 1. comprehensive, 2. global, 3. stable/constant, or 4. tailored to address the specific risks and characteristics of cryptocurrencies. In other words, different regulators have been testing diverse approaches, simultaneously, without engaging with one another, and without properly acknowledging the true needs and risks of the ecosystem.

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A well-executed exercise in snake oil evaluation

In the umpteenth chapter of UK governments battling encryption, Priti Patel in September 2021 launched the “Safety Tech Challenge”. It was to give five companies £85K each to develop “innovative technologies to keep children safe when using end-to-end encrypted messaging services”. Tasked with evaluating the outcomes was the REPHRAIN project, the consortium given £7M to address online harms. I had been part of the UKRI 2020 panel awarding this grant, and believed then and now that it concerns a politically laden and technically difficult task, that was handed to a group of eminently sensible scientists.¹ While the call had strongly invited teams to promise the impossible in order to placate the political goals, this team (and some other consortia too) wisely declined to do so, and remained realistic.

The evaluation results have now come back, and the REPHRAIN team have done a very decent job given that they had to evaluate five different brands of snake oil with their hands tied behind their backs. In doing so, they have made a valuable contribution to the development of trustworthy AI in the important application area of online (child) safety technology.

The Safety Tech Challenge

The Safety Tech Challenge was always intellectually dishonest. The essence of end-to-end encryption (E2EE) is that nothing² can be known about encrypted information by anyone other than the sender and receiver. Not whether the last bit is a 0, not whether the message is CSAM (child sexual abuse material).³ The final REPHRAIN report indeed states there is “no published research on computational tools that can prevent CSAM in E2EE”.

In terms of technologies, there really also is no such thing as “in the context of E2EE”: the messages are agnostic as to whether they are about to be encrypted (on the sender side) or have just been decrypted (on the receiving side), and nothing meaningful can be done⁴ in between; any technologies that can be developed are agnostic of when they get invoked.

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“I am yet to meet a young person that has not experienced some form of abuse via tech”

Technology-facilitated abuse describes the misuse of digital systems such as smartphones or other Internet-connected devices to monitor, control and harm individuals. In recent years increasing attention has been given to this phenomenon in school settings and the criminal justice system. Yet, an awareness in the healthcare sector is lacking. To address this gap, Dr Isabel Straw and Dr Leonie Tanczer from University College London (UCL) have been leading a new research project that examines technology-facilitated abuse in medical settings.

Technology-facilitated forms of abuse are on the rise, with perpetrators adapting digital technologies such as smartphones and drones, trackers such as AirTags, and spyware tools including parental control software, to cause harm. The impact of technology-facilitated abuse on patients may not always be immediately obvious to healthcare professionals. For instance, smart, Internet-connected devices have been showcased to be misused in domestic abuse cases to inflict physical harm. Smart locks have been used to trap individuals inside their homes, smart thermostats have been used to inflict extremes of temperature on victims, and remotely controlled lighting and sound systems have been manipulated to cause psychological distress. COVID-19 catalyzed the proliferation of these technologies within our environment, with sales of smart devices increasing 30% on last year. Yet, while these tools are advertised for their proposed safety and convenience, they are also providing new avenues for violence, harassment, and abuse.

The impact of technology-facilitated abuse is especially notable on young people. In recent years, pediatric safeguarding guidelines have been amended in response to increasing rates of knife crime, gang violence and drug trafficking in the UK. However, technology-facilitated abuse has evolved at a parallel rate and has not received the same level of attention. The impact of technology-facilitated abuse on children and teenagers may manifest as emotional distress, anxiety, suicidal ideation. Koubel reports the exacerbation of mental health risks born from websites that encourage self-harm, eating disorders, and suicide. Furthermore, technology-facilitated dating abuse and sextortion is increasing amongst adolescent populations. With 10% of children being affected by sexual solicitation online, the problem is widespread and under-investigated. As reported by Stonard et al. in “They’ll Always Find a Way to Get to You”, digital devices are playing an increasing role in relationship abuse amongst young people.

Vulnerable individuals frequently perceive medical settings as a place of safety. Healthcare professionals, thus, have a role in providing both medical and psychosocial care to ensure their wellbeing. At present, existing clinical and patient management protocols are outdated and do not address the emerging threats of technology-facilitated abuse. For clinicians to provide effective care to patients affected by technological elements of abuse and violence, clinical safeguarding protocols need a radical update if they are to assist professionals navigating high risk scenarios.

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The legal rule that computers are presumed to be operating correctly – unforeseen and unjust consequences

In this briefing note, we discuss the legal presumption that computers are operating correctly – a topic previously covered on Bentham’s Gaze, particularly in relation to the Post Office Horizon Scandal but that is also relevant to other areas like payment disputes. The briefing note is also available in PDF format at DOI 10.14324/000.rp.10151259, where it includes more detailed citations.

Overview

In England and Wales, courts consider computers, as a matter of law, to have been working correctly unless there is evidence to the contrary. Therefore, evidence produced by computers is treated as reliable unless other evidence suggests otherwise. This way of handling evidence is known as a ‘rebuttable presumption’. A court will treat a computer as if it is working perfectly unless someone can show why that is not the case.

This presumption poses a challenge to those who dispute evidence produced by a computer system. Frequently the challenge is insurmountable, particularly where a substantial institution operates the system.

The Post Office Horizon scandal clearly exposes the problem and the harm that may result. From 1999, the Post Office prosecuted hundreds of postmasters and Post Office employees for theft and fraud based on evidence produced by the Horizon computer system showing shortfalls in their branch accounts. In those prosecutions, the Post Office relied on the presumption that computers were operating correctly.

Hundreds of postmasters and others were convicted, sentenced to terms of imprisonment, fined, or had their property confiscated. This clearly demonstrated that the Law Commission’s assertion that ‘such a regime would work fairly’ was flawed.

In the December 2019 judgment in the group litigation Bates v The Post Office Ltd (No 6: Horizon Issues) Rev 1, Mr Justice Fraser concluded that it was possible that software errors in Horizon could have caused apparent shortfalls in branch accounts, rather than these being due to theft or fraud. Following this judgement, the Criminal Cases Review Commission referred an unprecedented number of convictions, based upon the supposed shortfalls in the Horizon accounts, to the Court of Appeal. Appeal courts have quashed more than 70 convictions at the time of writing. There will be many more appeals and many more convictions quashed in what is likely the largest miscarriage of justice in British history.

Were it not for the group litigation, the fundamental unreliability of the software in the Post Office’s Horizon computer system would not have been revealed, as previous challenges to Horizon’s correctness were unable to rebut the presumption of reliability for computer evidence. The financial risk of bringing legal action deterred other challenges. Similar issues apply in other situations where the reliability of computer evidence is questioned, such as in payment disputes.

The legal presumption, as applied in practice, has exposed widespread misunderstanding about the nature of computer failures – in particular, the fact that these are almost invariably failures of software. The presumption has been the cause of widespread injustice.

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US proposes to protect bank customers from Authorised Push Payment fraud

This week, at the US House Financial Services Committee hearing, Representative Stephen F. Lynch announced a draft of the Protecting Consumers From Payment Scams Act. If enacted, this would expand the existing protection for US customers (Regulation E) who have funds transferred out of their account without their consent, to also cover when the customer is tricked into performing the fraudulent transfer themselves. This development is happening in parallel with efforts in the UK and elsewhere to reduce fraud and better protect victims. However, the draft act’s approach is notably different from the UK approach – it’s simpler, gives stronger protection to customers, and shifts liability to the bank receiving fraudulent transfers. In this post, I’ll discuss these differences and what the implications might be.

The type of fraud the proposed law deals with, where criminals coerce victims into making payment under false pretences, is known as Authorised Push Payment (APP) fraud and is a problem worldwide. In the UK, APP fraud is now by far the most common type of payment fraud, with losses of £355 million in the first half of 2021, more than all types of card fraud put together (£261 million).

APP fraud falls outside of existing consumer protection, so victims are commonly held liable for the losses. The effects can be life-changing, with people losing 6-figure sums within minutes. It’s therefore welcome to see moves to better consumer protection. The UK was one of the first to tackle this problem, with a voluntary code of practice being put in place following years of campaigning by consumer rights organisations, particularly Which.

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Apple letting the content-scanning genie out of the bottle

When Apple announced that they would be scanning iPhones for child sexual abuse material (CSAM), the push-back appears to have taken them by surprise. Since then, Apple has been engaging with experts and developing their proposals to mitigate risks that have been raised. In this post, I’ll discuss some of the issues with Apple’s CSAM detection system and what I’ve learned from their documentation and events I’ve participated in.

Technically Apple’s CSAM detection proposal is impressive, and I’m pleased to see Apple listening to the community to address issues raised. However, the system still creates risks that will be difficult to avoid. Governments are likely to ask to expand the system to types of content other than CSAM, regardless of what Apple would like to happen. When they do, there will be complex issues to deal with, both for Apple and the broader technology community. The proposals also risk causing people to self-censor, even when they are doing nothing wrong.

How Apple’s CSAM detection works

The iPhone or iPad scans images for known CSAM just before it uploads the image to Apple’s cloud data storage system – iCloud. Images that are not going to be uploaded don’t get scanned. The comparison between images and the database is made in such a way that minor changes to CSAM, like resizing and cropping, will trigger a match, but any image that wasn’t derived from a known item of CSAM should be very unlikely to match. The results of this matching process go into a clever cryptographic system designed to ensure that the user’s device doesn’t learn the contents of the CSAM database or which of their images (if any) match. If more than a threshold of about 30 images match, Apple will be able to verify if the matching images are CSAM and, if so, report to the authorities. If the number of matching images is less than the threshold, Apple learns nothing.

Risk of scope creep

Now that Apple has built their system, a risk is that it could be extended to search for content other than CSAM by expanding the database used for matching. While some security properties of their system are ensured through cryptography, the restriction to CSAM is only a result of Apple’s policy on the content of the matching database. Apple has clearly stated that it would resist any expansion of this policy, but governments may force Apple to make changes. For example, in the UK, this could be through a Technical Capability Notice (under the Investigatory Powers Act) or powers proposed in the Online Safety Bill.

If a government legally compelled them to expand the matching database, Apple may have to choose between complying or leaving the market. So far, Apple has refused to say which of these choices they would take.

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What went wrong with Horizon: learning from the Post Office Trial

This Post Office trial has revealed what is likely the largest miscarriage of justice in UK legal history. Hundreds of individuals who operated Post Office branches (subpostmasters) were convicted on fraud and theft charges on the basis of missing funds identified by the Horizon accounting system. Thousands more subpostmasters were forced to pay the Post Office back for these shortfalls. But the Post Office trial concluded that Horizon was “not remotely robust”, and the supposed shortfalls might never have existed in the first place and, where they did, they might not have been due to the fault of the subpostmaster.

This scandal resulted from insufficient information being disclosed in the process of prosecuting subpostmasters, poor oversight of the Post Office (both by its management and by the government) and a failure of the legal system to view evidence generated by Horizon with appropriate scepticism. These matters have been discussed elsewhere, but what’s been talked about less are the technical failures in Horizon and associated systems that might have caused the supposed shortfalls.

I spoke to the Computerphile YouTube channel about what we’ve learned about Horizon and its failures, based on the Post Office trial. What seems to be a simple problem – keeping track of how much money and stock is in a branch – is actually much harder than it appears. Considering the large number of transactions that Horizon performs (millions per day), inevitable hardware and communication failures, and the complex interactions between systems, it should have been obvious that errors would be a common occurrence.

In this video, I explained the basics of double-entry accounting, how this must be implemented on a transaction system (that provides atomicity, consistency, isolation, and durability – ACID) and gave some examples of where Horizon has failed. For this video, I had to abbreviate and simplify some of the aspects discussed, so I wrote this blog post to refer to the Post Office trial judgement that talked about the situations in which Horizon has been identified to fail.

Failure of atomicity resulting in a duplication of a transfer

At 7:06, I talked about atomicity requiring that all parts of a transaction must occur precisely once. In the judgement (paragraph 346), an example of where Horizon duplicated part of a transaction following a system crash.

Mr Godeseth was taken, very carefully, through a specific use of the transaction correction tool in 2010. In PEAK 0195561, a problem was reported to the SSC on 4 March 2010 where a SPM had tried, on 2 March 2010, to transfer out £4,000 (referred to in the PEAK as 4,000 pds, which means either pounds (plural) or pounds sterling) from an individual stock unit into the shared main stock unit when the system crashed. The SPM was then issued with 2 x £4,000 receipts. These two receipts had the same session number. The PEAK, as one would expect, records various matters in note form and also uses informal shorthand. However, the main thrust is that when the SPM did the cash declaration, although the main stock unit (into which the £4,000 was being transferred) “was fine”, the unit from which the cash was taken “was out by 4000 pounds (a loss of 4000 pds)”. This is very similar to what Mr Latif said had happened to him, although the transfer in July 2015 to which he referred was £2,000. The PEAK related to Horizon Online and was the admitted occasion when the Balancing Transaction tool had been used.

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Evidence Critical Systems: Designing for Dispute Resolution

On Friday, 39 subpostmasters had their criminal convictions overturned by the Court of Appeal. These individuals ran post office branches and were prosecuted for theft, fraud and false accounting based on evidence from Horizon, the Post Office computer system created by Fujitsu. Horizon’s evidence was asserted to be reliable by the Post Office, who mounted these prosecutions, and was accepted as proof by the courts for decades. It was only through a long and expensive court case that a true record of Horizon’s problems became publicly known, with the judge concluding that it was “not remotely reliable”, and so allowing these successful appeals against conviction.

The 39 quashed convictions are only the tip of the iceberg. More than 900 subpostmasters were prosecuted based on evidence from Horizon, and many more were forced to reimburse the Post Office for losses that might never have existed. It could be the largest miscarriage of justice the UK has ever seen, and at the centre is the Horizon computer system. The causes of this failure are complex, but one of the most critical is that neither the Post Office nor Fujitsu disclosed the information necessary to establish the reliability (or lack thereof) of Horizon to subpostmasters disputing its evidence. Their reasons for not doing so include that it would be expensive to collect the information, that the details of the system are confidential, and disclosing the information would harm their ability to conduct future prosecutions.

The judgment quashing the convictions had harsh words about this failure of disclosure, but this doesn’t get away from the fact that over 900 prosecutions took place before the problem was identified. There could easily have been more. Similar questions have been raised relating to payment disputes: when a customer claims to be the victim of fraud but the bank says it’s the customer’s fault, could a computer failure be the cause? Both the Post Office and banking industry rely on the legal presumption in England and Wales that computers operate correctly. The responsibility for showing otherwise is for the subpostmaster or banking customer.

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Still treating users as the enemy: entrapment and the escalating nastiness of simulated phishing campaigns

Three years ago, we made the case against phishing your own employees through simulated phishing campaigns. They do little to improve security: click rates tend to be reduced (temporarily) but not to zero – and each remaining click can enable an attack. They also have a hidden cost in terms of productivity – employees have to spend time processing more emails that are not relevant to their work, and then spend more time pondering whether to act on emails. In a recent paper, Melanie Volkamer and colleagues provided a detailed listing of the pros and cons from the perspectives of security, human factors and law. One of the legal risks was finding yourself in court with one of the 600-pound digital enterprise gorillas for trademark infringement – Facebook objected to their trademark and domain being impersonated. They also likely don’t want their brand to be used in attacks because, contrary to what some vendors tell you, being tricked by your employer is not a pleasant experience. Negative emotions experienced with an event often transfer to anyone or anything associated with it – and negative emotions are not what you want associated with your brand if your business depends on keeping billions of users engaging with your services as often as possible.

Recent tactics employed by the providers of phishing campaigns can only be described as entrapment – to “demonstrate” the need for their services, they create messages that almost everyone will click on. Employees of the Chicago Tribune and GoDaddy, for instance, received emails promising bonuses. Employees had hope of extra pay raised and then cruelly dashed, and on top, were hectored for being careless about phishing. Some employees vented their rage publicly on Twitter, and the companies involved apologised. The negative publicity may eventually be forgotten, but the resentment of employees feeling not only tricked but humiliated and betrayed, will not fade any time soon. The increasing nastiness of entrapment has seen employees targeted with promises of COVID vaccinations from employers – who then find themselves being ridiculed for their gullibility instead of lauded for their willingness to help.

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