Wed Sep 23, 2015 4:44 pm

My thesis is that the transparent nature of the Bitcoin Blockchain leads us to the path of (nasty) government regulation.

This won't be some long theoretical opinion about technical Bitcoin flaws, I will provide you with some clear practical examples. People who love to have extensive government regulation, please move on and ignore this post.



What is exactly problematic about a transparent blockchain? Well, every UTXO has a history. This means mainly 2 things:

1) people who receive a transaction can see this history

2) miners who put transactions into blocks can see this history

Let me be clear. The issue we are talking about here isn't anonymity, it's fungibility.



You can try to hide your coins as much as you want, if you tried to mix your coins using a mixer, coinjoin or another type of "anonymity enhancing feature", we will at least be able to detect that you did. We maybe won't know who you are, but those coins can be flagged as "possible suspicious activity on the blockchain".



So what's the big deal about that? Well, this gives governments the possibility to regulate BTC transactions. Let me explain: Basically it comes down to these 2 possible scenario's: blacklisting and whitelisting



Government could on one hand through “whitelisting” obligate bitcoin users to identify themselves when they purchase bitcoins (this is already happening: KYC and AML) and ask them to whom they are transferring these bitcoins (Coinbase is already asking this for some transactions).

In the future this could lead to a situation in which only “identified” bitcoins would be spendable at regulated payment processors. Every business that accepts bitcoin in a certain jurisdiction would need to use a certified payment processors that only accepts "whitelisted" coins.

As a result, your anonymous bitcoins would only be spendable if you match them to your identity through a regulated authority (exchange, wallet service or directly through government). If you try to spend other coins, the payment processor could send them back you you (best case) or send them to a government wallet (worst case) and maybe you can claim the coins after you identify yourself (at least you have your coins back...)



A more aggressive approach is “blacklisting”. This is a system whereby the government makes it illegal to process certain blacklisted UTXO's.

Of course you would say that no miner would comply... But think about it. Would a large mining farm operator risk going to jail for "money laundering" or will he comply? After all, he has electricity bills to pay. The profit will be more important than the ideology.

This kind of regulation leads to a loss of fungibility. Bitcoin isn't fungible anymore if one bitcoin is accepted for payment or isn't mined anymore and another isn't.

If you are thinking that i'm exaggerating because there are a lot of jurisdictions and there will always be places where there will not be this strict regulation, you are right.

But it gets worse...



Not only governments but even companies will start to apply regulation by themselves as a form of self-censorship, because they fear government crackdown on their business:



We already saw the "whitelisting version" with the deposit of the Evolution coins to BTC-e. Those coins weren't allowed by an exchange that is pretty anonymous themselves! The reason is that they don't want the CIA and Europol on their doorstep, so they decided not to accepts possible money laundering activity.



And what about the blacklisting by the miners? I'm sure there will be ideologically motivated miners that will keep processing blacklisted UTXO's.

But there are far less pools than there are individual miners. The regulation will slowly affect this. I see a 5 stage system:



1) there will be some pools that voluntarily adopt the regulations, because they fear government crackdown (same situation as BTC-e with the Evolution coins)

2) some miners fear the government, so they ask their pool operators if they will comply with the regulations. If not, they move to a "regulated pool". It will slowly become a disadvantage for pool operators to not comply. If one uses mixed bitcoins, the transactions will start to suffer from delays because of less miners processing them.

3) the regulation will become more harsh. Building on a block that contains blacklisted transactions will become illegal. This will lead to more pools censoring themselves because they fear they will loose the block reward if they don't comply

4) the "illegal block depth" will become larger (f.e. not building on a chain which 3 blocks "deep" had a blacklisted transaction; more pools start to comply

5) almost everybody now complies and blacklisted UTXO's won't be spendable unless they pass through a regulation authority.



In essence this could lead to three kinds of bitcoins:

White bitcoins: bitcoins that satisfy the identification regulation.

Grey bitcoins: bitcoins that are not yet identified, but which are not actively anonymized. transactions are allowed, but not spending them at a certified payment processor.

Black bitcoins: bitcoins that are banned by miners. Processing them is illegal. Maybe even owning them...



The consequence?

Bitcoin will not be fungible anymore: you can’t just use a grey or black bitcoin to buy something from a webshop. If the government is able to discover that you possess black bitcoins or process blacklisted type transactions, you could even be seen as a someone committing a crime.



Eventually Bitcoin will become a fast payment system without counterparty risk but with full government control.

Is that what we really want?



And if you think these are all unlikely scenario's then well... we will talk again in 5 year's time.

Hi Charlie!It's really sad to see you in prison...I hope that the thought that people still care about you on the outside keeps you going!What I wanted to ask...Do you think that fungibility issues are the origin of all the problems we see now with BTC regulation?I did lose my trust in BTC because of this and wrote a reddit post about this issue a few months ago. i'll quote it below this message.If you can't see where money comes from or money goes to, you can't be held accountable for what your customers are doing with the money. AML/KYC is still possible, but there isn't a "guilt by association". With BTC, you can get in troubles if you send coins to a guy who is using it on f.e. SR, or when you accept coins who were used in a crime.Do you remember cornering Jeffrey Tucker and explaining him all about BTC? Well, this is basically the same thing I'm doing now with you. You NEED to know about what I'll post next:I am not here to pump altcoins or anything like that, but I think you should know more about the ring signatures that are implemented in the cryptocurrency 'Monero' ('coin' in Esperanto). It provides passive mixing across the whole network, no centralization required. You can even mix offline without consent of the others in the network. You can't even know a certain UTXO is spent or not. There is plausible deniability about whether you've send the coins or not.This currency also uses "stealth addresses" by default. You only need one address. Nobody can track the money they receive from you, so there is no need for "HD wallets" or something similar. Just plain and simple, one address.Also, there is a "viewkey" that, when made public, could prove certain transactions or make your balance transparent. It has privacy by default and is optionally transparent. So it's possible to still prove you made a certain payment (think about arbitration/escrow services, charities, etc)This cryptocurrency is completely fungible and can't be 'regulated' in the way that BTC is.Monero was fairly launched in april 2014, had no premine and has an active community of people who are aware of the fungibility issues with BTC. It is completely new code, not a fork of bitcoin. The development is done completely by volunteers and are funded by community donations. I'll link some more information below and would really like to keep you in the loop if you want. I hope that you look into this and don't just dismiss it as being a scam. I was an ideologically driven bitcoiner in the past, now I've become an ideologically driven monerano ('member of the monero community in Esperanto'). Although I love the bitcoin community, I don't believe BTC will be the revolution we all hope for.Links about Monero (XMR):The whitepaper describing the technology: https://cryptonote.org/whitepaper.pdf Our bitcointalk thread (first post has a lot of info): https://bitcointalk.org/index.php?topic=583449.0 our website: http://www.getmonero.org if you want specific info, I suggest you just mail the development team: dev@getmonero.org friendly greetings from Belgium,take care!dnaleor