CoinDesk recently wrote a piece on Bitcoin SV’s in-development digital asset recovery tool, comparing and contrasting it to the “kill switch” Satoshi may have been describing in 2010. The piece raises several interesting claims which we think warrant a response. I wrote a long form piece last September which touches many of the claims made in this piece in more detail, but in this short response post I will summarize and address what I see as the 5 main points more directly.
Claim 1: Bitcoin SV can be frozen and confiscated.
This is true. Bitcoin SV can be frozen or confiscated when miners in all relevant jurisdictions (effectively just the US and China right now) coordinate to simultaneously work together on the action, something that is effectively only possible when done honestly AND coordinated via international cooperation of law enforcement from these jurisdictions. Our post on how coordinated law enforcement actions could accomplish this dives deep into the details of WHY and HOW this might happen, and gives some guesses as to WHEN it may happen also.
While the CoinDesk article seems to imply that the potential for this type of action is unique to Bitcoin SV, it is true of virtually all blockchain networks, BTC included. We think this is a feature and not a bug of Bitcoin (both BTC, BSV, and all other versions) as it enables property rights to extend to digital assets. A prerequisite for the technology to be adopted and used for any extended period of time.
Claim 2: Satoshi Nakamoto suggested a similar process in 2010.
Its true that Satoshi did suggest similar processes in 2010 before leaving the project, even implementing things like the Alert Key which could be used to notify miners in the network that coins at wallet XYZ were proceeds of crime, for example. This was removed along with many other core components of Bitcoin from version 0.1 by other developers after Satoshi left the project. The forum post they cite in the CoinDesk article about Bitcoin being able to be turned from gold into lead when stolen, only to be turned back into gold once returned to the rightful owner is a unique property of Bitcoin preserved by Bitcoin SV which we think makes the Bitcoin SV superior to chains like BTC. Courts compelling miners to coordinate to restore stolen property via this type of software is the mechanism by which that functionality would be made possible.
Claim 3: Demanding Bitcoin developers to move coins without private keys contradicts cryptography.
From our point of view, this claim gets to the core of why many in the blockchain/cryptocurrency space misunderstand the reality that blockchain technology is subservient to the legacy system. Court ordered confiscation has little to do with cryptography but a lot to do with economic incentives.
The conventional view of Bitcoin is that it cannot be stopped because it is decentralized and uses cryptography. Crypto people are prone to thinking the way a government would confiscate proceeds of crime (they would frame this as “attacking the network”) would be via cracking the cryptographic algorithm used in Bitcoin OR 51% attacking the network, meaning becoming the dominant player in mining and then acting dishonestly by assigning coins without the required private key. Decentralization factors in because they imagine the network being so decentralized with tens of thousands of nodes that a motivated government would not be able to compel and coordinate 51%+ of them to do their bidding.
In reality, a motivated government would not need to crack cryptographic algorithms, become the majority miner, or compel thousands of disagreeable anonymous miners to do anything. Instead, governments would only need to contact the legal departments of the handful of large corporations acting as miners which make up the majority of the network and convince them to comply with court orders at the risk of jeopardizing their legal standings. At the time of writing (1/23/23), for BTC this would simply require serving court orders to two or three large corporations located in the US and China.
By definition, the small group of miners which dominate the power law of mining Bitcoin would be large corporations with substantial revenues. These types of companies fit the profile for economic actors who have an incentive to comply with courts rather than risk civil fines or criminal complaints. While it may be true that there are thousands of nodes on the Bitcoin network, the long tail of those nodes (beyond the 3-5 largest shown in the pie chart above) simply follow what the largest dictate. If, at the direction of the US and Chinese governments, Foundry USA, AntPool, And F2Pool confirm that coins from address XYZ are stolen and move them to address ABC which the US or Chinese government controls, they can do so without needing to change anything cryptographically and without any meaningful protest from any small nodes which may disagree.
When outlets like CoinDesk suggest that such an action would “contradict cryptography” they are imagining a completely different scenario where the government is essentially hacking the network. Since that would not be the case, the argument we are making often doesn’t resonate or get properly addressed.
Claim 4: The Bitcoin SV network wants digital assets to receive the same legal treatment as traditional assets.
This is true. From our point of view this is a no brainer. If Bitcoin, or another blockchain project’s, main value proposition is that it can evade law and ignore widely respected notions of properly law, we think that project is doomed. Building off of the foundation of this value proposition would by definition frame this network as a criminal network. We think most entrepreneurs, investors, technologists ,and end users are not interested in a criminal network.
Claim 5: The existence of such a tool would raise new complex legal questions.
This is also true, but maybe overstated. There certainly are some new legal questions raised regarding the implementation of such a tool specific to Bitcoin. For that reason, we think the legal process playing out between the Bitcoin Association and Tulip Trading will not be a fast one. Compelling Bitcoin miners to reassign coins which are proven to be owned by a party which lost access to them is a new thing. That said, the legal precedent underpinning such an order is not new. How to deal with stolen property generally, how to deal with the proceeds of crime which have been spent honestly X number of times after the initial theft, and other questions of property law have been worked out over centuries. What is also not new is the need for the coordination of law enforcement from multiple foreign governments to solve international crimes, especially in the internet and cryptocurrency era. The DOJ and FBI announced one such international effort involving a cryptocurrency website used for money launder proceeds of crime just last week.
Claim 6: Such a tool is against the spirit of Bitcoin.
What is the spirit of Bitcoin? This is another question at the foundation of a lot of these more surface level disagreements. The question often goes unrecognized with most assuming that it is already settled. Many in the Bitcoin and cryptocurrency space would argue that the technology’s primary value propositions are “decentralization” and “censorship resistance” as mentioned in the CoinDesk article. We think that these are essentially euphemisms for the ability to act outside the reach of law enforcement, something attractive to Bitcoin's disproportionately libertarian core community.
For reasons mentioned in this piece, we think that creating a network explicitly designed to operate outside of the law would be a technological blunder and an unattractive investment opportunity. Instead of this extralegal aim, we think that Bitcoin offers incredible benefits downstream from its efficiency, scalability, and interoperability enabling native internet micropayments and exciting new data use cases built on a public ledger. Bitcoin operating in a legal context offers these enormous benefits AND also has the benefit Satoshi described in 2010 of being able to turn stolen gold into lead and then back to gold when desired. When courts understand their ability to intervene in the way the Bitcoin Association is enabling with their digital asset recovery software tools, we think many more valuable use cases will proliferate while the negative-sum illegal use cases like money laundering or ransomware will rapidly diminish.