How Should We Regulate Cryptocurrencies via Consensus?: A Strategic Framework for Optimal Legal Transaction Throughput

Abstract

Permissionless blockchain consensus protocols have been leveraged for defining decentralized economies for the (commercial or private) trade of virtual and physical assets, using cryptocurrencies. In most instances, the assets being traded are regulated , which mandates that the legal right to their trade and their trade value are determined by the governmental regulator of the jurisdiction in which the trade occurs. Unfortunately, existing blockchains do not formalize proposal of legal cryptocurrency transactions, as part of the execution of their respective consensus protocols, resulting in illegal activities in the associated crypto-economies. In this contribution, unlike existing non-consensus solutions, which are prone to be more compute-time and audit-time intensive, we present a novel regulatory framework for blockchain protocols, for ensuring legal transaction confirmation as part of the blockchain consensus. As per our regulatory framework, we derive, through a stochastic game analysis, block proposal strategies under which legal transaction throughput supersedes throughput of traditional transactions, which are, in the worst case, an indifferentiable mix of legal and illegal transactions. Finally, we show that when a majority of the consensus protocol participants are licensed by the regulator to propose legal transactions, there exists a fair consensus execution policy to maximize the legal transaction throughput in the blockchain network.