On August 8th 2022, The US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned the Ethereum based mixing service Tornado Cash which they allege has been used to launder billions of dollars of virtual currency since its creation in 2019.
The Department of Treasury’s statement read:
“Today, Treasury is sanctioning Tornado Cash, a virtual currency mixer that launders the proceeds of cybercrimes, including those committed against victims in the United States…Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”
This messaging, and the fact that a federal agency would sanction a service like Tornado Cash, was not, itself, all that shocking to cryptocurrency and blockchain enthusiasts. This type of response from the government has been anticipated since Bitcoin’s launch in 2009. In fact, cryptocurrency and blockchain technology has been explicitly designed to be a thorn in the side of this overreaching state while providing autonomy to those who use it. The government and its law enforcement agencies can try to stop the underlying technology that provides this financial freedom, but those attempts will be in vain. Tools like Tornado Cash which are built using Ethereum and other decentralized technologies are censorship resistant. Right?
While the initial sanctions and messaging from the Treasury Department were not that surprising, the swift compliance-first reactions from major companies like Circle, Kraken, and others have shaken the cryptocurrency and blockchain space, raising fundamental questions about 1) how deeply law enforcement will be able to affect these tools via core companies that provide and service them and 2) what the implications of these legal realities are on the technology’s value proposition.
At Unbounded Capital, we have always shared the crypto/blockchain space's expectation that legal actions like what we just saw from the Treasury Department were coming eventually. What has set us apart from virtually all of our peers, however, is our position that these technologies would ultimately be effectively regulated due to operators being forced to comply with law enforcement.
In our view, this not only applies to companies that already have, like Circle and Kraken, but also extends to companies like Ethermine and major BTC mining pools. All of these companies, exchanges, stablecoin issuers, and miners can be described as centralized companies interacting with decentralized technologies. Despite this expectation, we are incredibly optimistic about the future of blockchain technology. Even though we think the alleged benefits of decentralization championed by our peers fall flat, we see a value proposition with far more commercial potential.
In this piece we will explore how:
Cryptocurrency/blockchain networks are being used to facilitate billions of dollars of criminal exchange
The US Government, with cooperation from international allies, have already seized cryptocurrency proceeds of crime and can continue to do so by legally compelling large miners to comply, even when law enforcement and miners lack private keys
Large miners are technically able to comply with such actions and will almost certainly do so
If/when criminal proceeds of crime are seized with the support of large miners, the value prop of most cryptocurrency/blockchain networks (namely BTC) will no longer be valid
Can Law Enforcement Censor Blockchain Networks?
The news that Circle and Kraken were freezing funds associated with Tornado Cash was upsetting to most blockchain and cryptocurrency enthusiasts. Despite being upsetting, the compliance at least fit within the consensus understanding of the technology. These companies can be considered to live in “layer two” as services which interact with the blockchain but are not themselves providing or maintaining the blockchain. As layer two services, their compliance with law enforcement might elicit a sense of betrayal to their ideological users, but how and why the people running these companies complied is no mystery. Both Jesse Powell, founder and CEO of Kraken, and Jeremy Allaire, CEO of Circle, softened the blow to their particularly ideological user base by expressing frustration with the sanctions. Powell supported the idea of a “constitutional challenge” against the sanctions while Allaire described the decision as regulatory intervention that “crossed a major threshold in the history of the internet.” Nevertheless, both companies did what they had to to remain in compliance. In Allaire’s Twitter thread addressing the situation he suggested that he was not alone, “it is likely that nearly all responsible registered Virtual Asset Service Providers also took steps to block customers from transacting with these (sanctioned) addresses, or face charges of willfully avoiding US sanctions compliance obligations, which can bring up to 30 years in prison.” When the CEO of a company with a 10+ figure valuation is faced with the decision of remaining compliant or eschewing regulators the decision is clear. Given these options, even the most ardently anarchist crypto enthusiast put in the same position would be hard-pressed to choose the path of non-compliance.
Interestingly, the ability to empathize with the incentives pressuring a CEO to choose compliance and the understanding of their ability to technically do so ends at companies on layer two. When considering an analogous situation involving a CEO of a successful company at layer one, or a company that provides or maintains the blockchain itself, like a major mining pool, the consensus understanding shifts dramatically. For these companies, the expectation is that they will defy law enforcement for the benefit of the network, partially due to the suggestion that even if these CEOs wanted to comply with regulators, they would be technically unable to do so without access to private keys. Laws that force people to do the impossible are unlikely to be effectively enforced, but is it true that a mining pool operator put in a similar situation would be unable to comply with the sanctions described as a major ongoing focus of the Department of Treasury? If it turns out that a mining pool CEO could comply despite lacking private keys, would they?
Why Law Enforcement Would Censor Blockchain Networks
Let’s play it through: Imagine an undercover US federal agent accesses a darknet market. The agent purchases methamphetamine and pays for the drugs by sending BTC to a wallet address listed on the site: 3JhPsVV3KnL9dBYGSZALS9EbrLr97R865a. After a few hours, the transaction is confirmed and the site indicates that the items purchased will soon be sent via mail. A few weeks later, a package arrives at the US mailing address provided by the agent. The contents are sent to a lab and confirmed to be methamphetamine. This process happens a few more times by various undercover agents. Sometimes the agents send the BTC to the same address as the first agent (BTC address ending R865a), sometimes they send to a different address provided on the site like 3HSZc4BLnQBznjSq7JvXgqNCZUUs3M9fZz. By using chain analysis tools, the US law enforcement agencies running the investigation take their growing list of confirmed BTC deposit addresses and begin to construct a graph of addresses which interact with, and belong to this darknet market.
In total, they estimate over $5 Billion worth of cryptocurrency has been sent to the darknet market, making it the largest known operation of its kind in the world. Next, US law enforcement locates the provider used to host the darknet market’s servers, which are in Germany. This enables the agencies to identify the likely operator of the darknet market, a man named Dmitry. When, over a series of months, invoices sent from the hosting provider are paid by Dmitry, his direct involvement becomes more likely. Finally, law enforcement observes several BTC wallets owned by Dmitry receiving payments from the darknet market’s linked BTC wallets giving the agencies sufficient evidence to get a US federal indictment for Dmitry’s arrest and forfeiture allegations for all associated assets including the darknet market’s BTC. At the same time, and with the support of German law enforcement, the darknet market’s servers are shut down and over $25M worth of BTC is seized through physical access to relevant BTC wallets. Over 100 other inaccessible BTC addresses are simultaneously added by OFAC to the Specially Designated Nationals and Blocked Persons List, effectively blocking the assets off from the regulated financial system and buying time for law enforcement to obtain any necessary seizure warrants.
So far, everything described has already happened. Last April, the Russian darknet market Hydra was shut down by joint efforts between US and German law enforcement. With only $25M of the over $5B of assets in custody of law enforcement, it is hard to imagine that all possible steps to process asset forfeiture on the remaining funds would not be taken. Nearly $100M of the funds were traced back to Estonian cryptocurrency exchange Garantex which has since shut down after being sanctioned by OFAC, but the vast majority of funds are unaccounted for besides being effectively frozen via the OFAC SDN list.
How Law Enforcement Can Censor Blockchain Networks
So what’s next? How might law enforcement seize the billions of outstanding proceeds of crime? And what role might layer one companies, like mining pool operators, play in that process?
According to the US Department of Justice’s Asset Forfeiture Policy Manual, the process for forfeiture of any asset begins with seizure warrants to the relevant parties. The section specifically on seizure of cryptocurrency lists the three likely types of warrant recipients, apparently listed in order of the easiest process to the most onerous.
“In the case of cryptocurrency held in a locally stored wallet in the United States, the seizing agency should obtain a seizure warrant for that cryptocurrency possessed and controlled by the owner and serve the warrant on the owner or the owner’s counsel. In the case of cryptocurrency held in an account or wallet hosted by a U.S.-based service provider, such as an institutional exchange, the seizing agency should obtain and serve a seizure warrant on the service provider, similar to executing a seizure warrant on a bank account.”
So far, both of these steps appear to have happened in the Hydra action. What’s interesting to the layer one question is the next paragraph
“Many cryptocurrency service providers are located outside the United States. Prosecutors should consult the Office of International Affairs (OIA) regarding seizure of cryptocurrency from foreign-located service providers, even in cases where a wallet company does not itself have access to or control of the private key. Generally, such seizures will require use of a mutual legal assistance treaty (MLAT) request or other similar authority….Prosecutors should consult OIA regarding the seizure of cryptocurrency from foreign-located service providers, such as institutional exchanges. Some exchanges located outside the United States might have U.S. offices or points of contact and will accept service of U.S. seizure warrants…”
In the Hydra action, German law enforcement seized the Germany-based cryptocurrency. The seizure of cryptocurrency from “foreign-located service providers” which might “not itself have access to or control of the private key” but would “accept service of US Seizure warrants” may next apply to mining pools.
But isn’t BTC decentralized? Perhaps, but what does that mean? According to BTC.com, 83.9% of the last month’s worth of BTC blocks have been mined by six companies: Foundry USA, AntPool, F2Pool, Binance Pool, Poolin, and ViaBTC.
A quick Google search of these companies reveals four of their corporate headquarters’ mailing addresses with the two others (F2Pool and Poolin, both based in China) no doubt attainable by motivated law enforcement.
Foundry USA Pool
350 East Ave Suite 201, Rochester, NY 14604AntPool
Building 25, North Olympic Science & Technology Park Baosheng South Road, Haidian district, Beijing, ChinaBinance
6th Floor, South Bank House, Barrow Street, 4 Dublin, IrelandViaBTC
3305 Tower A Tianxia International Center
Shenzhen, Guangdong, China
Both Ireland (Binance) and China (F2Pool, Poolin, AntPool, and ViaBTC) have active Mutual Legal Assistance Treaties (MLAT) with the United States which are mentioned as required in the DOJ’s Asset Forfeiture Policy Manual. Article 16 of each respective MLAT has to do with assistance in Forfeiture Proceedings, noting that each nation will assist with actions to temporarily immobilize proceeds of crime and/or dispose of them. The US DOJ in conjunction with Ireland and China sending six total Asset Forfeiture Warrants would be trivial., especially when the incentive of obtaining billions of dollars worth of proceeds of crime is so high (sometimes even directly incentivizing the agencies which seize the assets directly rewarding them with a portion of the forfeited assets).
Valid Transactions Without Keys
This is the point in the process where true believers in the cryptocurrency consensus imagine the story will end. Sure, maybe it’s possible that CEOs like Mike Colyer of Foundry USA, Jihan Wu of Antpool, Chun Wang of F2Pool, CZ of Binance, Kevin Pan of Poolin, and Haipo Yang of ViaBTC will desire to remain compliant rather than risk losing their businesses, just like we saw with Jesse Powell and Jeremy Allaire when dealing with Tornado Cash funds. But unlike those layer two CEOs, the consensus story goes, these layer one CEOs will be technically unable to do anything with the forfeiture orders and will have to tell law enforcement that they literally cannot comply absent being provided the private keys for those addresses.
Unfortunately for the self assured crypto enthusiast, but fortunately for the compliance-concerned CEO, this is not technically correct. Software designed to translate legal documents into machine readable language, specifically Bitcoin script, in order to enable miners to easily comply with exactly this type of court order is already in development. Technically speaking a group of six miners which together comprise 84% of the network could act in unison to freeze or reassign funds to a government controlled address, a requirement outlined in the DOJs policy manual,
“Thus, it is imperative that once authorization to seize the virtual currency is obtained, it be transferred to an agency-controlled wallet. This will not only preserve the cryptocurrency for forfeiture but will also preserve the jurisdiction of the court in a civil forfeiture case, because in rem jurisdiction is premised upon the court’s control of the asset. All seized cryptocurrency should be held in “cold storage,” i.e. in a secure offline device, until it is transferred to a designated government- controlled custodial wallet, per current USMS procedures.”
These six top miners could act in unison under the direction of their respective federal law enforcement agencies, all coordinated by the United States DOJ, to freeze or reassign funds from known, and previously sanctioned, Hydra BTC addresses to a newly created address under the control of the DOJ. All of this could happen without the miners needing access to the inaccessible private keys. If this happened, what could be done to stop it? Beyond requiring the coordination of relevant law enforcement and the software to make compliance technically feasible, there is no technical limitation in networks like BTC which would prevent this type of action. In BTC, the unilateral freezing or reassigning of coins is practically impossible due to the consensus mechanism of the network. Individual miners unilaterally reassigning coins from wallet A (not in their possession) to wallet B (in their possession) is disincentivized by resulting in a break in network consensus. When done dishonestly, this would result in the lone miner effectively creating a forked network which would be ignored by all relevant parties like BTC owners, exchanges, block explorers, applications, etc rendering the action economically useless. BTC’s design requires that transactions need to be added and approved in consensus with the majority of other miners on the network as measured by hash power. Typically this consensus is achieved through honestly observing which transactions are broadcasted to the network which compute to TRUE due to the signature of a corresponding private key for each transaction. While in almost all cases this need for corresponding private keys is true, consensus can be achieved through outside coordination as well. Dishonest coordination, like the top 6 mining pools conspiring to rob users of funds with the goal of enriching themselves, while technically possible, is not in the interest of miners for several reasons. First, they would be killing their golden goose by rendering the BTC network untrustworthy and thus less valuable at the exact moment they are succeeding in the competitive landscape of being miners of the network. Second, they would be committing a crime publically on an immutable evidence trail and, as we have established, they are easy to locate and access by law enforcement making them targets for litigation from those harmed in the theft. But when the coordination is orchestrated by law enforcement in all relevant jurisdictions those incentives flip on their head. In that scenario, the transfer of coins from address A (keys not in the DOJ’s possession) to address B (keys in the DOJ’s possession) pursuant to orders from law enforcement would be done to maintain consensus AND remain compliant with relevant laws. Those attempting to stop the action like miners, exchanges, and other companies interacting with the network would be risking non-compliance. As Circle’s Allaire suggested regarding Tornado Cash sanctions, it's likely “nearly all responsible virtual asset service providers” would do what was necessary to remain compliant “or face charges of willfully avoiding US sanctions compliance obligations, which can bring up to 30 yeras in prison.”
To claim that the above process is impossible one would have to argue that the following claims are false. Which of these steps seems incorrect or unreasonable?
The top 3-6 mining pools on BTC make up over 50% of the network’s hash rate
Major mining pool companies are identifiable by law enforcement
Law enforcement agencies will be motivated to seize large amounts of cryptocurrency proceeds of crime
Law enforcement agencies can coordinate across jurisdictions to pursue major asset forfeitures
Major mining pool companies will pursue a compliance-first approach, like we saw with Kraken, Circle, and others
When a majority of miners on the BTC network simultaneously agree that coins in address X have been sent to address Y, despite lacking a transaction which used the correct private key to address X, the coins will indeed be transferred to address Y
Forks of BTC (or other blockchains) which exist for the express purpose of evading coordinated international law enforcement actions will not receive support from core layer one and layer two companies like miners, exchanges, wallets, applications, etc resulting in a massively suppressed market price
The Rise and Fall of Resistance-BTC
In any case, it's possible that grassroots opposition from ideological cryptocurrency enthusiasts might attempt a “hash war” to resist this “state-coordinated attack”, as they would likely frame it. This attempt would be in vain. First off, the DOJ could serve more than six forfeiture warrants. Any successful opposition by start-up miners fomenting a resistance would by definition require them to become large operations (or use large operations like AWS or Google Cloud) which law enforcement could identify and then compel to comply in the same manner as the initial miner cohort. For the sake of argument let's assume that a truly grassroots resistance is able to coalesce with millions of individuals spinning up ASIC machines and operating software on home servers to fight back against the DOJ’s attempt to seize proceeds of crime from a Russian darknet market. Imagine that, together, they are able to match the power of the prior market leaders and now have 50% hashrate. Even in this fanciful scenario, what would be won by the resistance? With major mining pools complying and implementing the court orders, the grassroots hashrate would create what has become known as a user activated fork of the network, splitting BTC into two chains: one compliant and one non-compliant. The non-compliant chain run by home users would now need to find exchange support to access liquidity. Exchanges like Kraken and Coinbase have already made their preference for compliance clear, so Resistance-BTC, trading under the ticker RBTC, would need to find smaller risk-loving exchanges (like now defunct, Hydra-linked Garantex) or start entirely new ones. Users holding RBTC would need to find wallet and cold storage support to make interacting with their coins easy enough for the vast majority of BTC holders and investors who are mostly non-technical. Companies like CashApp, Robinhood, Trezor, and Ledger would likely avoid adding support for the new chain out of concerns of tiptoeing into non-compliance despite it being trivially simple to do so technically speaking. Given all of the above, what would the market price of RBTC be? Would there even be a well established “market price” without deep liquidity on major exchanges?
There has been very little public information on Hydra-related legal actions since early April 2022 when the DOJ announced their investigation, filed the indictment, worked with German law enforcement to seize a small portion of the cryptocurrency assets, sanctioned the remaining BTC and placed it on the SDN list, and worked with Russian law enforcement to arrest the website’s primary operator. It is possible that the next steps of the hypothetical described in this piece are already underway, with law enforcement working to compel major BTC miners to reassign funds to a DOJ controlled wallet. This would explain the lack of in rem asset forfeiture documents being a part of the announcement, something included in similar cases like the DOJ’s action against darkweb CSAM marketplace in late 2019. The DOJ’s Asset Forfeiture Policy Manual notes, “...in rem jurisdiction is premised upon the court’s control of the asset.” If the DOJ is preparing legal actions against the assets with the help of major mining companies, we would likely see Asset Forfeiture documents titled “United States of America v One Hundred Cryptocurrency Accounts” after that reassignment took place.
The Future of Compliant BTC
As unpopular as it is to acknowledge in ideology-driven cryptocurrency circles, a compliance-oriented future for BTC is inevitable. This is clear based on the fact that we are already in a compliance-oriented present. The response from major companies in the cryptocurrency space to Tornado Cash prove this. If this compliance-first approach extends from layer two companies down to layer one companies, a process that regulators are incentivized to initiate and CEOs of successful companies are incentivized to carryout, BTC will find itself in an uncomfortable position. As Matthew Green, cryptocurrency thought leader and cryptography professor at Johns Hopkins, noted in his tweet, “If censorship resistance isn’t a goal, these networks can be a *whole lot* simpler and more efficient.”. BTC and most other popular networks in the cryptocurrency space have optimized almost entirely for censorship resistance, a euphemism for the ability to operate outside the reach of the state and its law enforcement agencies. If law enforcement is able to see through the process of forfeiture and reassignment of illicit funds just a single time on a single blockchain, it will remain a tool at their disposal when the benefits outweigh the significant costs and simpler means of asset forfeiture like arresting individuals and compelling them to give up the keys or interacting with layer two companies like Kraken, Coinbase, and Circle is impossible. Because BTC has invested so much in the censorship resistance value proposition, a compliance-oriented future is incredibly bearish for the asset’s price. If my BTC isn’t censorship resistant then what is it?
What’s Bitcoin Good for, anyway?
The answer to this question used to be easy. Bitcoin was a virtually instant, virtually free to send, and fixed supply peer-to-peer electronic cash system. For the sake of preserving censorship resistance, the developers at the helm of BTC and most other cryptocurrency projects sacrificed each of these other properties, transforming BTC into a “censorship resistant store of value” something entirely different from a peer-to-peer electronic cash system. At Unbounded Capital we are incredibly optimistic about the future of the internet equipped by a fast, free, scarce and peer-to-peer electronic cash system and are focused on investing in the companies that are leveraging this technology today.
The vision of an online currency that can operate outside the state has excited the crypto niche for decades, even preceding Bitcoin’s release in 2009. At Unbounded Capital, we think that properties which are interpreted as features by this niche, like complete self-sovereignty (read: total responsibility) and censorship resistance (read: extra-legality), are actually bugs for the vast majority of potential users. Even if enabling these properties was as simple as flipping a switch on or off, we think most users would prefer the protections offered by hosted solutions with customer support teams and the ability to do something as simple as recover funds which are stolen from you with the support of law enforcement. What’s so incredible about the history of Bitcoin is that the trade offs made for self-sovereignty and censorship resistance were enormous, effectively rendering the vast majority of use cases for a peer-to-peer electronic cash system impossible, all for the search of a network totally impervious to law enforcement. When the illusion that the cryptocurrency space has built such a network, whether referring to BTC, Ethereum, or the dozens of other networks promising the same, pops, what remains?
At Unbounded Capital we have long avoided many of the crypto buzzwords dejour, like ICOs, IDOs, DAOs, and other similar use cases rooted in the decentralization/censorship resistance value propositions. Instead, we have focused on scalable token infrastructure (RUN and Tokenized), micropayment infrastructure (HandCash), and companies leveraging those technologies to deliver novel, revenue generating value propositions (DXS, Haste, UNISOT, and others) absent from token sales, relying on speculative fervor, or, importantly, the illusion that the value of these new technologies is tied to their ability to operate outside the control of any third party including law enforcement.
Ultimately, we think that Matthew Green from Johns Hopkins is right in saying that “If censorship resistance isn’t a goal, these networks can be a *whole lot* simpler and more efficient”. By focusing on the networks which are simple and efficient we are positioning ourselves for the long epoch after the decentralization bubble pops. The actions from law enforcement and the responses from cryptocurrency and blockchain companies surrounding Tornado Cash may well be the early foreshadowing of the bubble’s burst, but at Unbounded Capital we think that its full impact will not be felt until layer one companies, primarily those serving BTC, are revealed to be compliant with law. We welcome this transition as we think the resulting shift in capital allocation mindshare, and competition will result in enormous value generation dwarfing the cumulative impact of everything we have seen in blockchain and cryptocurrency to date.
To learn more about our thesis visit UnboundedCapital.com and read our ebook to learn more about how and why we view the blockchain opportunity differently from all of our peers.
Update: A prominent Venture Capitalist of a Tier-1 firm read the piece and asked four insightful questions and wanted the public to see our responses.
Hey! That's an interesting and kind of depressing piece :). Censorship resistance is something that really appeals to me about BTC -- basically a way to exit corrupt government systems.A few questions come to mind:
1) this makes sense for wallets involved w/criminal activity. how about for non criminal? my hunch is that the govt wouldnt want to piss off $100B+ of BTC asset owners by seizing funds not involved w/criminal activity. and if that's the case, then maybe BTC price drops because you can't have censorship resistance for criminal activity, but it's ok for non criminal? i think btc could still keep a lot of its value in that case.
A government seizing crypto-assets without cause is technically possible for the same reasons its possible with cause, but from our point of view this is no different than the same question but for non-crypto assets. Would China comply with the US if they wanted to seize Apple’s China based assets? If so, how would that work?
It's an interesting question that's hard to answer but from our point of view the key factors in that scenario are non crypto related or blockchain related. The fact that the blockchain industry, BTC proponents primarily, paints a picture of BTC having technically innovated this possibility away is simply untrue.
One nice thing about blockchain is that its public, immutable, and transparent. This remains true even in the “rouge coalition of states seizing assets'' scenario. This means that the theft from the state would be identifiable publicly on an immutable evidence trail.
Either way, one difference between Unbounded’s thesis and the more crypto anarchist/cypherpunk thesis is that we are investing for a future where we don’t have total civilizational collapse. Many in BTC are anticipating and optimizing for a collapse scenario, making “state grade censorship resistance” an appealing goal. In that scenario maybe their design choices will prove wise but in that scenario we also have much bigger problems.
To the second part of this question, there is a component of scale. Would the US work jointly with China and Ireland with the support of dozens of their various law enforcement agencies to seize $5B proceeds of crime from an online drug market? Sounds like they would. Would they do that for a low level drug dealer? Almost certainly not. This scenario we are painting assumes that the benefit outweighs the cost because of the scale of the crime. We think most small scale crime will be 1) too expensive to identify and 2) too expensive to remedy in this way. Traditional police work is more likely in those circumstance (eg. identify a criminal, locate him, arrest him, make him give you the private keys, use BTC the way everyone else does when seizing those assets by using a private + public key pair
2) also wonder if countries would change laws if they feel abused? e.g. if china or russia or ireland felt like their citizens were being targeted unfairly by US seizure requests, would those countries have any recourse?
If the US went rogue and was illegally seizing assets then this might be possible. Again I think this is the same on and off blockchain. Those mutual legal assistance treaties are always subject to revision, but there will always likely be a coalition of major states which work together to remedy international crime in our increasingly globalized world.
3) could large pool operators relocate to countries that don't need to heed to US requests?
This is a common idea in crypto - it’s possible in theory but the list of countries willing to aid those types of criminal operations (from the US POV) is small. The penalty for this type of resistance is essentially being cut out of the global financial system. Countries which are blacklisted by FATF (The Financial Action Task Force) for example are North Korea and Iran. Their “greylist”, or countries under increased scrutiny, includes 21 countries with places like Syria, Haiti, Yemen, South Sudan, Pakistan, etc. Most of these countries are not ideal locations to run businesses with billions of annual revenue. There are other countries like the Caymans or UAE on that greylist which are better but the US and its coalition for the foreseeable future will always be able to strongarm others if they desire. Is it worth it to these countries for the tax revenue on BTC miners?
4) finally, is there a chance that new types of mining pool entities emerge? e.g. a mining pool run by a DAO, which represents tons of individuals pooling their own ASICs? i'm not super deep on DAOs, so maybe this is a dumb idea.
This is the holy grail of BTC’s (and pretty much all other blockchains’) design choices. “How do we make this system as decentralized as possible to resist government laws and regulations?” During the last decade of BTC, they have limited the blocksize for this reason causing 1) tiny (7tps) throughput capability, 2) high fees (which they hope increase over time), and worst 3) terrible UX which alienates 99% of the world (eg. “run your own node at home”). And after all of that they are still vulnerable as described in the piece. The reality is that pareto distributions/power laws exist and things become more efficient at scale. Scale ⇒ centralization ⇒ not “censorship resistant”. They are fighting against natural laws. Even DAOs are kind of a “decentralization three card monte”. DAOs have developer teams and run on servers. Successful DAOs run on bigger servers (public cloud). The reality of power laws catches up to these things.