Big government attempts to freeze a bitcoin address. Laughter ensues

Published: 2019-01-17

 

Q: Can government regulate/sanction Bitcoin Addresses?

Based on a recent press release (selected quoting) : Government-sanctioned bitcoin addresses and censorship resistance. ... Under government order, the U.S. Department of Treasury... announced they would put two bitcoin addresses under sanctions, because the people using those addresses... were recognized as Iranian ransomware hackers. ... They used international and U.S.-based crypto exchanges to launder money back to Iran... through the legacy banking system. ... The order states that 'all property and interests in property of the designated persons that are... in the possession or control of U.S. persons-' ... 'are prohibited from dealing with them. ... This order is prohibiting entities from sending or receiving funds from these two specific addresses.

How does this even work? Do miners need to drop transactions to these addresses from blocks? Does it mean that this is a censorship attack vector against Bitcoin? If these sanctions become a trend, would it be possible for anyone to try to enforce compliance... to these sanctions without having a majority of the hash rate? What does this mean for Bitcoin's censorship resistance?

First of all, let's understand the magnitude of this tremendous blacklist the U.S. Treasury has created. They blacklisted not one, but two bitcoin addresses, out of a total bitcoin address space of... 2^160, which means they have blocked two out of 1.461501637 x 10^48 possible addresses. That is 10 with 48 zeroes after it. I'm not that good at math, I had to pull out my calculator... in order to figure that one out, but I think that leaves a few addresses not on the blacklist.

By my calculation, 1.46 x 10^48 minus 2, there are still plenty of addresses left. Considering that your average wallet or laptop computer can probably generate a million address per second, that means 15 million addresses could have been generated just since I started that sentence. I could generate new addresses in order to have new places to receive funds.

This entire concept is ludicrous. It represents a fundamental misunderstanding. Or does it? This is the U.S. Treasury trying to apply its authority on this novel medium. They will start small, but this will clearly escalate. This game of whack-a-mole cannot be won by technical means, so they will try political means, by applying pressure to any regulated entities that dare to not enforce the blacklist. This demonstrates that, when you have a decentralized currency and no one is in control, but around the perimeter you have a number of centralized, regulated entities like exchanges, then this will create a significant conundrum. Those centralized regulated entities now must conform to this absurd regulatory scheme... of blacklisting these two addresses.

Now there is two; soon, there may be two-hundred thousand or a million. Maybe the list of blacklisted addresses will be updated every ten seconds through a live feed... and they must maintain real-time compliance. It is a ridiculous scheme because it completely fails to achieve any of the presumed goals, if you really believe the goals are to reduce money laundering or financing for terrorist activity.

On the other hand, you might have this crazy idea that the purpose of these regulations... is not to prevent terrorist financing -- because this scheme obviously fails at that goal -- but to further expand the power, control, and authority of various national governments over their citizens... and create a surveillance mechanism over a completely captured financial industry... that pervades the life of every person, thereby destroying democratic institutions, checks and balances. You would be right.

So what does this do? It furthers the goal of strengthening the surveillance system and financial controls, not for the purposes of actually controlling crime. We all know how sanction countries like these are funded: through banks. But it serves the role of extending authoritarian control over citizens. It will be completely ineffective, practically speaking, in Bitcoin. It will mostly affect the legitimate regulated entities which operate on the fringes of Bitcoin: centralized exchanges, merchant services, etc.

For private individuals and miners who are anonymous and physically distributed, it doesn't change much. It demonstrates the importance of maintaining decentralization and anonymity in the system. That is the latest news on censorship resistance in Bitcoin. Things may become very weird over the next few years as various entities around the world... try to grapple with this thing that doesn't fit any of their preconceived notions and regulatory schemes. They have banned a number! Well, in Australia, the laws of Australia apparently supercede the laws of mathematics, so why not? Why not ban a number just because it is pointless? To exercise power for the pursuit of power itself. The means are the goal.

 

Filed Under: Bitcoin Regulations