Ep. 752 Is Crypto Ready for AI & Quantum Computing Risks?

David Schwed discusses the critical intersection of privacy and blockchain technology, emphasizing that effective security practices are essential for the future of cryptocurrency. He warns organizations about the risks posed by nation states and other threat actors, particularly in light of quantum computing's potential to compromise existing cryptographic ciphers used in blockchain. Schwed stresses that organizations must assess the implications of past data leaks, as the issue of decrypting stored encrypted data cannot be addressed retroactively.

Near is highlighted for its commitment to privacy and the integration of AI with blockchain. Schwed argues that privacy should be part of a comprehensive security strategy rather than treated as a standalone concern. He points out that banks face similar quantum risks as Bitcoin but have centralized decision-making structures, while Bitcoin's decentralized nature complicates achieving quantum resistance. Collaborations between MicroStrategy and Coinbase aim to develop quantum-resistant solutions for Bitcoin, while Ethereum's more centralized framework may allow for necessary protocol upgrades.

The transition to quantum resistance is not an immediate crisis but requires careful planning over several years. Schwed notes that the upgrade process for Bitcoin will involve the same stakeholders as previous upgrades, such as Ethereum 2.0. He emphasizes that quantum resistance is critical infrastructure, akin to financial market infrastructure, and will require firmware updates to wallet systems.

In the security discussion, Schwed contrasts multi-party computation (MPC) with hardware security modules (HSMs). HSMs are tamper-resistant and already utilize quantum-resistant ciphers, while MPC requires collaboration among different parts to sign transactions. Organizations are working to prepare MPC for quantum resistance, but many still face challenges related to social engineering, as demonstrated by a recent attack that led to significant financial losses.

Threat actors are increasingly employing sophisticated methods to spoof legitimate communications, including emails and phone calls. Schwed advises individuals to verify phone numbers by calling back official sources, as caller ID can be easily manipulated. He also notes that many organizations lack a proper understanding of AI, which can lead to misuse and declining output quality over time due to poor data input. Prompt injection is identified as a significant risk in AI applications, leading to a recommendation for organizations to evaluate prompts using deterministic code.

The operationalization of cryptocurrency has the potential to reduce counterparty risk in financial markets, with predictions indicating that the evolution of these markets could enable the clearing and settling of transactions within minutes in the next three to ten years. Major banks are introducing tokenized deposits and stablecoins, signaling a shift in how traditional finance interacts with digital assets.

Schwed predicts that the financial landscape will undergo significant changes in the next three to five years, driven by these innovations. The technological foundations of cryptocurrencies like Bitcoin, Solana, and Nier are crucial to their value creation, suggesting that infrastructure plays a key role in market performance. While acknowledging the risks associated with these developments, Schwed maintains that they are all solvable, reflecting a cautious yet optimistic outlook.

Major financial institutions are moving beyond mere hedging and are actively engaging with cryptocurrency products, indicating a growing acceptance of digital assets in mainstream finance. Schwed expresses excitement about the potential for new products and services to emerge in the financial sector as a result of these transformative changes.