Celsius Network’s bungling showed why centralization can’t protect privacy


In Celsius Network’s recent court filing, the billion dollar centralized finance (CeFi) The platform exposed more than 14,000 pages of customer identity and on-chain transaction data without user consent, a fateful reminder that privacy without decentralization is no privacy at all.

As part of its bankruptcy proceedings, lending giant CeFi Celsius Network Revealed names and chain transaction data of tens of thousands of his clients in an October 5 court filing. While the Celsius user base complied with standard Know Your Customer (KYC) procedures for opening personal accounts with the CeFi platform, none consented to or could have anticipated a mass disclosure of this scope or scale.

In addition to doxing the multimillion dollar withdrawals From Celsius founder Alex Mashinsky and chief strategy officer Daniel Leon just before Celsius’s bankruptcy announcement, the disclosure prompted tens of thousands of CeFi users to reconsider what the settled privacy protections entail and how systems that incorporate some degree of trust or centralization can compromise those protections. .

To protect privacy, any degree of centralization or specialized authority exchanges use in the future must avoid the failed Celsius model. Otherwise, privacy will become another false promise that is revealed in the fine print.

uncharted territory

While unpleasant to say the least, Celsius’s massive data dump points to more than outright distrust of authority and opaque organizations. As usual, at the intersection of chain finance and law, there are many gray areas.

An emerging and nascent industry, the blockchain space has already spawned a mess of unprecedented conflicts and disputes that neither the existing legislation nor the established jurisprudence have developed a reliable methodology to navigate. Even in the nuanced legal environment of 2022, the courts are not adequately prepared to uphold the legal principles established in the on-chain domain.

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In defense of their clients, Celsius’s legal representatives allege that they issued requests to remove private client data from their disclosures. However, their requests were ultimately rejected by the court on the grounds that all Chapter 11 bankruptcy proceedings require a complete and transparent “creditor matrix.” Obviously, such a bankruptcy rule was written and passed several ages before the advent of distributed chain lending protocols; a time when financial institutions didn’t have 14,000 pages of purported creditors.

To set the record straight, Celsius legal officials have also stated that under Celsius’s terms of service, all user funds deposited on the platform belong essentially to Celsius. Thus, as the de facto owner of all customer deposits, Celsius’s publication of customer transaction data ventures further into confusing legal territory as to the parameters that define ownership and therefore therefore, privacy protections on the chain. space.

In any case, Celsius customers have permanently lost their privacy. The only sure verdict is that there can be no certainty in relying on an unprepared legal system to uphold privacy rights in fluid and uncharted territory.

Celsius is not alone

Although dramatic, the collapse of Celsius is only the most recent in a period of CeFi industry bankruptcies. The platform’s $1 billion shortfall filed in bankruptcy filings has been far less the exception than the rule.

Once one of the most beloved and powerful CeFi platforms in crypto, the rise and fall of Celsius serve as a painful reminder to critics and crypto advocates alike that a core team can become a singular point. failure at any time. Also, centralized KYC procedures always carry some risk of exposure in legal proceedings.

The situation now facing tens of thousands of innocent crypto investors points to a much broader principle: that privacy cannot be truly conferred or absolutely protected within the confines of a centralized system. Even with the best of intentions in mind, professionals on both sides of the court have little legal precedent to fall back on as they navigate new and puzzling territory.

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As on-chain data analysis becomes more sophisticated, hackers more intriguing, and personal data increasingly valuable to marketing agencies and authorities, privacy-conscious individuals must exercise the utmost caution in determining which crypto platforms best align with and protect your interests.

After all, Google, Meta and the rest of Web2 platforms that the crypto community has since dismissed as exploitative and archaic are just as private as Celsius and its CeFi counterparts. Each provides privacy as a service. Meanwhile, its users’ search histories, account information, and browsing preferences are private to almost everyone except, of course, the platform itself. As the Celsius bankruptcy proceedings have shown, even the best-intentioned custodians are not a sufficient substitute for decentralized architecture.

The real promise of blockchain-based systems is that what they grant, whether it be asset ownership, scarce monetary units, or permissionless contracts, cannot be regulated, erased, or modified on a whim. Their constitutions are written in code. Each and every one of the modifications are coordinated and executed by decentralized autonomous organizations (DAO). There is no trust between counterparts, just a shared belief in the permanence of the principle and the wisdom of the collective.

In the same way that privacy has been a prerequisite for personal freedom and self-expression since time immemorial, decentralization is today a prerequisite for privacy online and, to that end, on-chain.

alex shippe is the Strategy Director at Offshift, where he contributes to the platform’s tokenomics, produces content, and conducts business development on behalf of the project. In addition to his role in the industry as a private decentralized finance (PriFi) expert, he has also served as a writer at the Elastos Foundation and as an elected representative of the ecosystem at Cyber ​​Republic DAO.

This article is for general information purposes and is not intended to be and should not be taken as investment or legal advice. The views, thoughts, and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.