Bad Idea: Registry of Tainted Bitcoins
Ellery Davies, CRYPSA Co-chair – November 2015

What if someone were to create a public registry of tainted coins?

We’re talking about Bitcoin, of course—a fully distributed, peer-to-peer currency, with no authority, choke point or compulsory rules of engagement. But, the thing about any decentralized processes is that it defies authority. In fact, authority bastardizes the whole concept by threatening every advantage of a distributed mechanism.

One of my partners at Cryptocurrency Standards Association feels that an official list of tainted coins would be a valuable service, because it would effectively take undesirable coins out of circulation. That is, it gives governments or a trusted mediator the ability to take the profit out of criminal activity. Coins that are stolen involved in illicitly activity could simply be declared worthless.

Wait—The registry argument gets better…

If the registry is consulted for every transaction, why not add coins that are declared ‘lost’ by a wallet owner. Eventually, one can envision a mechanism for resuscitating the lost value with a replacement coin. After all, if a registry can invalidate a coin, it shouldn’t be difficult to create a sister registry of sanctioned ‘alternate’ coins. These coins don’t satisfy the mining algorithm, but they are blessed with equivalent value by right of their 1-1 substitution for coins that were decommissioned.

Something Rotten in Denmark

A registry—even a decentralized registry—guts the entire concept of a p2p currency. It substitutes agencies or politics for the decentralized democracy of a pure blockchain mechanism. It erases ‘inalienable rights’ from the Constitution and replaces it with committee decisions. After all, committees know whether you should be permitted to keep your money. Isn’t that why Satoshi created Bitcoin?!

When I point this out to my CRYPSA co-chairman, he stresses that accessing the registry would be voluntary. Just as with our own standards for real-time transaction verification or ID validation, parties to a transaction needn’t abide by the tainted coin registry. This is an unsatisfactory justification, of course, because a registry can only provide the value that he envisions, if it ultimately grows to be consulted before every transaction or redemption. After all, the goal is to make de-listed coins to worthless for any legitimate business. So, eventually, the registry would lock out some users.

In my partners view, tainted coins could continue to circulate, but they would eventually be marginalized to the dark web. They would be useless for legitimate business, commerce and taxes, because the ‘good’ guys will shun payments that contain any tainted component.

Can Gold Turn to Lead In Your Pocket?

By 2009, Amazon demonstrated that, for many readers, bits is better than ink. The Amazon Kindle reader began to displace the printed page. Sales of eBooks were reaching parity with the dead-tree editions. But one day in June, Amazon decided to withdraw several books that individuals had purchased and downloaded. Technology thwarted the owner, as property they thought was durable suddenly vanished from their pocket. Students not only lost books that they had paid for, they also lost annotations that they had added in the margin.

Amazon explained that there was a question as to whether the distributor had the necessary rights to distribute the book. (They conveniently sidestep the fact that Amazon was the distributor!). Ironically the book was by George Orwell, who predicted—decades before the Internet—that an overseer would cause books to vanish in the hands of readers; power wielded by authoritarian ideology.

Do we want to turn Bitcoin into an authoritarian power play? That’s what happens when we undermine the math and look to committees and lists to tell us what has value. Bitcoin’s value is bestowed by math. It can be mined, saved, traded or spent, but it is always validated by pure math. Math is more trustworthy than any list, because the math is like open source. Anyone can validate the facts. Let’s explore…

For the moment, let’s assume that a registry of tainted coins gains traction. That is, let’s say that major banks, retailers and creditors begin to compare transactions against this list of invalidity before agreeing that a payment was received or a debt settled.

Giving anyone or everyone the power to flip a valid coin from valid to invalid is notoriously bad idea. It generates a slew of bad things. In such a world…

1. Bitcoin is no longer a decentralized currency. It now has both oversight and a nexus.

2. It has a choke point. Therefore, it has:

• a performance bottleneck

• a point of failure

• a point of government interdiction (and/or liability for failing to comply)

• a point of complaint, arbitration, law suits

• a conduit for hackers

• a political arena for politicians

3. Someone, somewhere will deduce a record of queries into the database, logging data like who? —and from where? That means an investigator could isolate and tabulate transactions did not query the database. Do you see where I am going with this?

4. But here is the real problem: A registry of tainted coins prevents mixmasters from serving the public interest (I call it the “One Bad Apple” theory): With a registry of bad coins in a p2p ecosystem, all transactions are effectively centralized, serialized and subject to government scrutiny. Bitcoin becomes bastardized. It becomes the providence of governments instead of the the people.

Suppose that 10 BTC are declared “stolen” by a verifiable wallet owner—and they are listed on the tainted coin registry. The 10 BTC was transmit to a mixmaster in Cyprus (perhaps before the date of reporting). The mixmaster wallet contained 100,000 BTC, and has since been used for 15,000 unrelated transactions (including the payment for a Pizza in New York by a school girl).

In this scenario, a tainted coin registry has no meaning. My partners design schema suggests that all subsequent transactions and coins (anything that was mixed in the opaque phase) should be invalidated and subject to local laws. Do we really wan’t to visit that world?!

Note to Self: Cherish Privacy

For those who value anonymity and privacy, there is a way to take the ‘registry card’ off the table.Use a TOR-like mixmaster to make every payment, debt and personal exchange opaque to 3rd party snoops. Even better, imagine the day when an anonymizer process is baked into wallets by default. Think about it…

By embracing anonymity and making it ubiquitous (i.e. transferring currency through a mixmaster process), forensic investigation is thwarted from the get go. Every payment and money transfer becomes untraceable. Guilt by association becomes impossible, because under the sheets, everyone might have come into contact with anyone and everyone.

Someday, everyone will use these services. Private transactions won’t stand out, because it will be the norm, just as secure web connections are used by everyone. It is an embodiment of The Satoshi Principles!

In summary, a registry decentralizes Bitcoin, even if the registry itself is distributed into the blockchain.

• Because a registry is punitive list, it requires a mechanism for arbitration

• Because it requires a mechanism for arbitration, it is effectively centralized
      (After all, a committee of peers cannot ‘vote’ on whether a coin was lost stolen)

• A centralized process is subject to oversight, regulation, political interests and coercion

• Oversight, regulation and coercion are antithetical to primary blockchain benefits

Bottom Line: A registry of tainted coins is both a choke point and an avenue for regulation. It cannot be useful.

Ellery Davies is co-chair of CRYPSA. He writes the Bitcoin articles here at A Wild Duck and sits on
the New Money board at Lifeboat Foundation. He is also former CEO and Director of Vanquish Labs.

We Need A Registry of Tainted Bitcoins
Manuel Perez, CRYPSA Co-chair – November 2015

What if law enforcement and major banks had
a registry of tainted or “dirty” virtual money?

In the world of Bitcoin and cryptocurrency, an open ledger—called the blockchain—contains a registry of all transactions since the first bitcoin was created in 2009. Bitcoiners regularly report the identification number of stolen coins so that miners can be on the lookout for people trying to sell stolen goods. Imagine if this were extended to a globally recognized registry sourced and maintained by miners and dedicated Bitcoin enthusiasts who seek to keep stolen coins out of circulation. This same idea was proposed and within a bitcoin Reddit thread over a year ago and accepted by consensus.

Similarly, the US government has recorded the ID of all virtual currency used in the illegal trafficking of drugs on the dark web’s Silk Road. The same goes for the cryptocurrency used by other criminals that were caught as well as those of their clients. But this is not like the serial number on a dollar bill: Bitcoins change ID after every transaction, and every bitcoin can be tracked back to its creation by checking transactions on the blockchain: it only affects the users who have dirty money, directly or by association.

This means that every anonymizer or “mixer” that just combines clean coins with tainted coins to ensure privacy is actually bringing law enforcement attention to the people that use the service. In fact, every mechanism that lets a criminal hide his or her identity behind an innocent merchant or customer is actually contributing to that merchant or customer’s loss of confidence in our excellent alternative to the existing financial system. And, if law enforcement wants to find the owner of a specific public key, they can track the person down via metadata and digital fingerprints.

A fellow founding partner of the Cryptocurrency Standards Association is totally against such a registry, for good reasons related to freedom, equality and privacy. But, I think the cat is out of the bag, and the only solution is total transparency…

Just imagine being able to know the risk you run when accepting some bitcoins from a total stranger: would you actually want to receive coins that were used to pay off an assassin.

My partner, Ellery, claims that the government would never prosecute an individual, but do you know what happens if you try to deposit a counterfeit bill in your bank account? You lose it, and the cops arrest the person who gave you the counterfeit bill. This happens with cash! And there is no registry that I can access to tell me the serial numbers of tainted cash… though the police do have the list of all marked and tracked bills. Our safety lies in total transparency, plus standard and procedures for UN-tainting virtual currency. One simple mechanism available under existing US law is having government sell it to you after seizing it: the FBI actions of the Bitcoins taken from Silk Road are an example. Another way to clean them would be through a court proceeding.

Has the registry slowed down the processing of transactions? Not at all, since no one is actually filtering transactions: filtering can only be done at the individual miner level, and only at that level. Other miners simply continue processing transactions normally. But law enforcement is taking note and preparing the prosecution’s case.

And, if any hacker tries to change the registry, well, if I was law enforcement I would compare all versions of the registry I had and would be very happy when I found evidence of hackers since I would be collecting data to go back to their place of work and capture them. In fact, the registry will be regularly rebuilt, just as the blockchain is reanalyzed when it is processed. This is the most wonderful thing about computers: they don’t get tired.

Guilt by association might be unfair and maybe even wrong, but this is like the person who marries an alcoholic: you know the risks and have to deal with them.

It is also unfair to think that a mere accusation will taint a Bitcoin or other virtual currency: Existing laws presume innocence, but law does allow for confiscation under certain rules, and a court decision is one of them. The problem here is that a Bitcoin criminal can flip his dirty money in milliseconds, and can bilk thousands of people before the police can get a leg up on the crime. In these cases, the registry can show what happened, and help bilked losers go to court to recover the value of their bitcoin.

In fact, without the registry—without the open ledger of the blockchain—how can innocent consumers demonstrate that there are victims of a crime? There is no greater coercion than the actions of a criminals because there is little recourse to be had—save a bigger, tougher criminal. And criminals thrive when there is no transparency and accountability.

Bottom Line: We need the registry of tainted coins to be as widely distributed as the blockchain. Standard mechanisms for cleaning tainted coins can and should be established. CRYPSA can help do this without creating a centralized control infrastructure over the virtual currency industry. This is not the case, were we to leave this registry exclusively in the hands of governments.

Manuel Perez is a certified Anti-Money Laundering specialist and Co-chair of the Cryptocurrency Standards Association. He spent two decades overseas as an oil industry executive, before transitioning to finance and accounting—an ultimately to Bitcoin.