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Proof of Assignment

By Craig Wright | 13 Nov 2019 | Alternative Coins & Systems

The Bitcoin blockchain is an immutable audit trail, which does not mean that money cannot be seized or that illicit images and other material cannot be filtered. Immutability does not require non-assignability. An immutable object is something that remains unchanging over time, and once a block is sufficiently deep, any transaction within Bitcoin or any blockchain is unable to be changed. The scenario is analogous to an Oracle database running an account system in write once read many (WORM) formats. It is used in all public companies in the US. Such a system does not preclude the correcting of mistakes; it requires that a mistake is noted and followed.

A record cannot be removed from Bitcoin, but as with all code-based systems, alterations can easily be made. The secret behind Bitcoin is that the alterations are publicly recorded.

International law contains many provisions for the redemption of funds and the seizure of criminal assets. Bitcoin does not remove the ability to seize assets, but it does require some level of international cooperation. A worldwide freezing order and a subsequent action of asset seizure would require enforcement actions in multiple jurisdictions. The requirement, of course, limits the types of orders and actions that can be done. Every small government seeking to abuse the rights of their citizens will not be able to use Bitcoin in order to seize assets. Where crimes are heinous enough in multiple jurisdictions, as are major drug trafficking, people smuggling, high-level money laundering, and other crimes, we will find that multiple jurisdictions can act simultaneously.

Governments will retain the right and privilege to seize goods and to assign property. Bitcoin or any blockchain or cryptocurrency cannot alter the scene. To believe otherwise is to live in a child’s dream. A Republican democracy requires transparency to be healthy and thrive. Which is what Bitcoin delivers. Every time property is seized under the laws of the jurisdiction, it is recorded. The scenario is not what any totalitarian government would desire. It is what a free society needs. In Nazi Germany and Stalinist Russia, records were kept away from the people; they were maintained in a manner that did not allow people to know how many property seizures had occurred, how many people had been moved or imprisoned, or anything that would let people see the full scope of the horror that was occurring.

The ability to hide money outside of the government’s ability to tax only hurts the poorest people in society. Rich businessmen and corrupt politicians and their ilk thrive in the darkness. There are many legal uses for tax shelters, but all of them can be constructed using privacy and without anonymity. It is not the rich who suffer from anonymity, nor is it the corrupt. The people who suffer are those who have the least. In a society where few can be truly anonymous — and no cryptocurrency can remain truly anonymous without significant external controls — it is those involved in crime and corruption that benefit the most.

None of us like tax. But you don’t fight it through evasion. Doing so only leads to more taxes, more complexity, and more government. A simple tax system where everyone needs to pay and which is transparent allows people to see what is occurring and to debate the benefits and the costs.

Court is the ultimate distributed system. The multitude of lawyers, judges, and lawyers in a common law judicial system creates a truly distributed and decentralised method of decision. It is true, decisions may not go your way, but such is the nature of all systems. The only system that can be guaranteed to go your way is a centralised system where you are the dictator.

An action, taken by government, courts, or individuals using such systems, does not remove information from the Bitcoin blockchain. It records the change. An assignment, say, involving the recovery of Bitcoin Core (BTC) or even the seizure of Bitcoin Core (BTC) from a drug dealer or another criminal by a government does not present a difficulty. The court will issue an order, law enforcement will enforce it in other jurisdictions, at which point the miners will act to enforce the rules.

Only miners are nodes in the Bitcoin network. And importantly, as is written in the Bitcoin white paper:

Any needed rules and incentives can be enforced with this consensus mechanism.

A change does not remove an entry from the blockchain; a change to an unspent transaction output (UTXO) is recorded. As such, it becomes public knowledge that the UTXO has been assigned. Any individual can see the action. What can be less public is the implementation of a freezing order. A set of courts can issue orders that can remain private. Such will allow the freezing of any coin based on a FIFO (first-in, first-out) methodology. Miners and exchanges would be required to block and reject selected Bitcoin addresses or keys. Such an action is only temporary. But, the action does not need to be recorded on the Bitcoin blockchain. It’s preferable for all such actions to be public, and it is likely, given the international nature of Bitcoin, that court orders issued to freeze assets will of course leak. It would be incredibly difficult to issue orders to hundreds of parties without the indication of leaking.

Exchanges and Wallet Providers

Whether we’re talking about Blockchain.com, Bitcoin.com, Coinbase, Kraken, OkEx, BitGo, or any of the multitude of online providers in the Bitcoin and cryptocurrency space, the first thing to note is that a single one of such wallet services, exchanges, and alternative providers that seeks to counter a validly issued freezing order will be criminalised and face first contempt and then sequestration, before being shut down as a criminal operation. The expected lifespan of an organisation allowing bitcoin to be traded following the issuing of a valid freezing order that is enforced in its jurisdiction would be minutes. The executives of the organisation would become criminals if they were to oppose the order.

Without infrastructure, Bitcoin and any other cryptocurrency lose all value. To be of use, the transactions made over a blockchain need to be exchanged without concern of being seized later. They need to follow monetary law. If they fail to do so, they lose all value.

Monetary tracing follows the FIFO rule. The Bitcoin blockchain allows traceability, and provides a record of all transactions from a point in time on. Consequently, if a freezing order is issued and made publicly available, any transactions that follow from the respective coin will also be covered by the freezing order. Any mixer or even transaction involving individuals that would have had the ability to determine the nature of the frozen asset will be covered. Bitcoin is a technological solution, and the implementation of orders is simple.

In 2010, when I implemented the alert key, it was a very early and nascent attempt at a system that would allow individuals and miners to instantly know of events that would affect them; the centralised nature of a key belonging to just myself and then later a few developers unfortunately was problematic, and would have opened avenues for abuse of an attack. At the value of bitcoin at the time, the risk was not significant. Bitcoin has increased in value greatly, and so the same would no longer be the case.

In the future, governments will be able to issue their own alerts using their own keys, allowing individuals to monitor data that is put on the blockchain — ensuring that any attempted abuse will be recorded. The ability to recover money is an essential aspect of money. For Bitcoin to be legal and to work within the real world, it will need to start addressing AML and KYC laws. For Bitcoin to act within the real world, to be usable, to grow, and to become a system that is utilised across multiple industries requires that government intervention is accepted.

It is important to note that Bitcoin was never designed to act outside of the law, nor was it designed to attack government. A system of transparent exchange cannot be made to favour criminals. Unfortunately, criminals will always find some gap in knowledge, which they use to advance their abuse. In time, governments and regulators start to come to understand even the most complex of systems. Bitcoin has now entered such a phase. Any blockchain falls under the control of monetary exchange laws. Bitcoin is not anonymous, and no blockchain can be made anonymous. It is antithetical to the nature of how blockchain-based systems work; they offer transparency, and transparency does not work well in darkness.

In time, we will quite simply find that exchanges and custodial operators that do not follow anti-money laundering (AML) regulation and new rules such as the final adopted fifth money laundering directive (MLD5) in the EU will cease to exist.

Validating Nodes; AKA Sybil Systems

There is no such thing as a validating node in Bitcoin. Bitcoin scales using SPV, but even with what some people in the BTC religion call full validating nodes, only miners matter. In particular, nodes were designed to preclude Sybil systems. Bitcoin is a proof-of-work system. Nodes are defined in six steps in the white paper. Any system that does not complete all of the six stages is not a node in Bitcoin. As such, any Raspberry Pi system is alluding itself. Your Raspberry Pi will never find a proof-of-work. Any such system is by definition a Sybil.

So, you think you can fork off and avoid a series of court orders. The miners won’t follow you. Any miner seeking to follow your new chain will be in contempt of court. The mining node operator lies in the hands of a company with a huge capital investment. Even a pool operator must invest money in systems and networks. Such an operator is easy to locate, and if they choose to continue mining against the rules, they will be reminded that law forms a subset of rules and miners exist to enforce, not to create, such rules. One rule of monetary systems including Bitcoin exists in the implementation of anti-money laundering (AML) controls.

You can imagine now that it doesn’t matter whether your group of friends doesn’t like a particular action taken by government. Perhaps you disagree with the court order. Too bad. This is the real world. It doesn’t matter whether you seek to use Bitcoin Core (BTC), Ethereum (ETH), or some other blockchain-based system that has copied Bitcoin (BSV); you come under the control of monetary law.

Let us say that you and 50,000 nodes (and there are not 50,000 nodes on Bitcoin; real nodes mine, and the reality is that there are less than 20 nodes in total on BTC and even fewer on ETH) decide to protest. The result will be that you will have no effect: Mining is the process used to form consensus within the Bitcoin network. It involves a proof-of-work algorithm, and does not care about the protests of individuals who do not have skin in the game.

For you have two options:

1. You can invest a significant amount of money, and we’re talking hundreds of millions of dollars in creating a new fork of Bitcoin (as it happened with BTC and BCH), and either choose to follow the court order (in which case, there is no fork) or become an attacker and seek to act against a legally issued order. In the event that you seek to act outside the law, no exchange or wallet provider will legally be able to touch you. You will not be able to transfer value to other parties. You will not be able to transfer money for and from fiat currency. You will not be able to transfer money for goods and services. Basically, you will be a criminal entity subject to sequestration. That is, your assets will be seized. After they are seized, you won’t be mining anymore.

2. Accept the order and grumble about it.

Bitcoin is not designed to act as an outlaw money system. I spent well over a decade ensuring that there were no holes that could lead to the problems DigiCash’s eCash, e-gold, and the myriad of other systems that had existed in the ‘90s had introduced. In particular, proof-of-work was designed to ensure that the system would always lead to a number of competing entities that acted to protect their investment. Miners do not vote in a political system. Miners enforce rules, and rules include law. You may not like it, you may think blockchain should be different, and yet, it doesn’t matter. It is, in reality, the same as complaining about water being wet. The blockchain, Bitcoin is designed in such a way that it offers transparency and acts inside the legal frameworks that protect the majority of people from criminals.

The biggest advance and achievement in Bitcoin lies in the creation of a system that, once scaled, cannot be made anonymous. And once scaled, it can never be made to unscale and work. There is no way to create a blockchain that has value and enables transactions and yet allows people to act outside of money handling laws.

The Lightning Network

The Lightning Network is not a layer on top of Bitcoin. Layers would act within script and transactions. The Lightning Network is a parasitic external protocol. Having said so, law still applies. In the case of Lightning, it is simple: anti-money laundering (AML) rules apply on a FIFO or first-in, first-out basis. A government seizure of coin, a freezing order, and other legal action would simply close down the channel and all connected parties. The result of using the Lightning Network is losing your money if a single bad actor seeks to act outside of the blockchain. You see, the Lightning Network is not about privacy; it’s about losing transactional records. The sole reason for the Lightning Network to exist lies in helping criminals and others who seek anonymity and not privacy; no blockchain would allow it.

Payment channels are allowable, but the difference between a payment channel and the way the Lightning Network works lies in whether the people involved in a transaction are known, and whether value transfers are settled on-chain. The Lightning Network is constructed for middlemen and third parties to engage within a series of transactions in a manner that allows them to interact without leaving any transactional records. In other words: a dark transfer of funds — one that is not transparent.

We can take Alice and Bob as the two endpoints in a series of Lightning Network transactions that settle on-chain. Inbetween, Alice and Mallory exchange value. And Mallory and Charlie exchange value. And then, Charlie and Bob exchange value, and eventually, the Lightning channel closes. Mallory just happens to be a people smuggler. She has been using the Lightning channel to reassign funds. Unfortunately for Alice and Bob, they have just aided and abetted in the proceeds of money laundering. Under existing money rules, both Alice and Bob are liable to have their money seized. As such, they encounter one of the non-technical reasons why the Lightning Network will fail. There is also nothing that Alice or Bob can do. They will need to keep records of all the transactions, and the Lightning Network doesn’t do so.

The CFAA

The final aspect of today’s post is to point the reader to the Computer Fraud and Abuse Act (CFAA; USA). We have our own version of the CFAA here in the UK, but the US bill has been more widely reported on.

Bitcoin transactions are information. All nodes, which, remember, are miners, are by definition involved in interstate or foreign commerce and communications. It also makes them, by definition, a protected computer. To use a node in intentionally seeking to bypass the rules of the system — by propagating transactions to or from individuals and addresses that have been subject to a freezing order — would be to knowingly try and access a protected computer to obtain something of value. The rules would allow any individual who has lost money because of a fork resulting from such a scenario to bring civil action for damages and even to apply for injunctive relief against each of the violators, who through nodes seek to act against a valid court order.

Such an action would not be limited to individuals in the US. It would allow people globally to take action against a node operator. Similar laws apply throughout Europe and in China.

The end result is simple: neither Bitcoin nor any blockchain enables individuals to act outside of the law. The limits are bounded through transparency, the requirements for enforcement orders to be recognised internationally, and the fact that there is no global government. There are many things governments do not agree on. In many cases, a government will not be able to take action outside of its own jurisdiction. Any government can limit transactions within its own jurisdiction and implement freezing orders. Such a limited order would be ineffective in Bitcoin against an international party, with the individual being able to move to a new address, unless they hold their bitcoin in a local wallet that is directly subject to the order.

Here lies the true beauty of Bitcoin. Bitcoin stops major crimes, and allows for funds that are transferred using it to be seized anywhere in the world, yet simultaneously limits actions taken by restrictive rogue governments. Even where actions are taken within the law, it is transparently recorded on the blockchain. You may say, “Not my BTC,” but the reality is, you have no say. If you don’t like the law in a democratic system, you have the opportunity to vote or even run for parliament. If you don’t like how democracy works, work to change it.