bitcoin BTC
-1.31%
While it is rare for miners to refuse to process transactions for approved addresses at the moment, there is a risk that this will become common practice in the future as regulatory pressure on the industry increases.
U.S. regulators are watching cryptocurrencies and miners have reason to be cautious even if they aren’t in the crosshairs right now, according to Ben Hutten, a partner at law firm Orrick.
“If a miner provides services to people on the (sanctions) list, OFAC may consider it to be providing material support to a sanctioned person, which could be grounds for imposing sanctions on the service provider,” Hutten told The Block. He said. , referring to the Office of Foreign Assets Control.
Christopher Bendiksen, head of Bitcoin research at CoinShares, shares this view and believes that some miners will eventually start censoring transactions linked to addresses on OFAC’s list, which “will be a cost of doing business for them in the West.” He said.
Some early warning signs
To get ahead, some miners may voluntarily implement anti-money laundering measures on-chain, and there are signs that this is already happening.
On November 20th, an anonymous Bitcoin researcher named 0xB10C published the following article: blog post They said their Mempool monitoring tool discovered six Bitcoin transactions that were not included in blocks from three major mining pools: ViaBTC, F2Pool, and Foundry. All transactions included addresses previously placed on OFAC’s sanctions list.
To be clear, 0xB10C believes that what they witnessed was an isolated incident that did not signal a larger signal. “A single pool that does not contain a few transactions does not lead to censorship. This may just be a preference of the pool owner,” they told The Block.
Transaction 0xB10C is highlighted. blog post Most were shipped in September and October. address Attributable to OFAC China Fentanyl Precursor Seller. In another transaction the following inputs were made: address Connected to Russian-approved OTC services SuXAccording to the blog post.
All of the transactions in question were later picked up by other miners and eventually recorded on the Bitcoin blockchain, 0xB10C said. The analysis showed that both transactions were likely rejected accidentally by ViaBTC and Foundry, while F2Pool filtered them out intentionally, the researchers wrote.
This was unofficially confirmed by F2Pool co-founder Chung Wang, who commented in a now-deleted X post: “Why are you surprised when I refuse to confirm transactions for criminals, dictators and terrorists? I have every right not to.” “Is there no deal between Vladimir Putin and Xi Jinping?”
Although it has been deleted now archived A few hours later, he said F2Pool would “disable the tx filtering patch until the community reaches a more comprehensive consensus on this topic.”
Foundry and ViaBTC declined to comment.
pressure rise
Orrick’s lawyer, Ben Hutten, said the miners had every reason to feel they were being targeted. OFAC and FinCEN will put pressure on the cryptocurrency industry, he told The Block.
Sanctions and legal action against cryptocurrency mixers, most notably Tornado Cash, have shown that regulators are willing to innovate in their own way.
“FinCEN (the U.S. Treasury Department’s Financial Crimes Enforcement Network) Proposed Special Measures Any mixing of cryptocurrencies has been designated as a major money laundering problem,” Hutten said. “Historically, these measures have been taken only for jurisdictions or financial institutions, but more recently we have taken these special measures for certain types of transactions.”
Hutten believes there is still little risk for small-scale individual miners. “But for example, if you have a mining service, you can find a new block, get new bitcoins, hold them, split them up 20 ways and send them,” Hutton said. “It has a regulated status in the U.S. under the rules.”
Recent news involving the stablecoin Tether provides another look at how the relationship between cryptocurrencies and U.S. regulators may develop in the near future. Tether has been freezing addresses linked to criminal activity for years and recently announced it had blocked addresses from a U.S. sanctions list. The company also reported that it “recently added the U.S. Secret Service to our platform and is working on the same for the FBI.”
Moving towards a censored future
In 2021, US mining company Marathon Digital briefly introduced transaction filtering for addresses on its sanctions list.
“We discontinued this feature because it proved to be unpopular and impractical,” Charlie Schumacher, Marathon’s vice president of corporate communications, told The Block. He added that it would be impractical for companies to ‘filter’ Bitcoin transactions, but that if there were a legal requirement to do so, the company would follow suit.
“Everyone in the industry recognizes that they’re not going to win a gunfight with the U.S. government,” said CoinShares’ Bendiksen. He added that U.S. miners and pools with publicly known teams and founders are more likely to follow rules, even if they don’t necessarily agree.
The concept of transaction censorship makes no economic sense for miners, Bendiksen continued. If you don’t mine this or that transaction, someone else will mine it and take away the fees, he said.
However, problems with U.S. regulators could result in higher costs. Even in a hypothetical situation where all major pools agree to filter out certain transaction lists, there will still be miners who do not follow these rules. However, since this represents a small portion of the overall hashrate, it could take hours or even days for a “banned” transaction to finally be recorded on the blockchain, Bendiksen said.
In theory, a new informal consensus could avoid mining transactions that are on the OFAC blacklist, as well as refuse to build new blocks by orphaning blocks with transactions mined by other miners. Bendiksen said this could be seen as some kind of 51% attack on Bitcoin, leading to a chain split, and that the idea is already gaining acceptance in Washington policy circles.
Carole House, former White House Director of Cybersecurity and Secure Digital Transformation and current Executive in Residence at Terranet Ventures, spoke: DeCenter Spring Conference Last April, Princeton University proposed exactly that.
inside her speech, House suggested that it would be good if miners and validators of proof-of-stake blockchains came together and agreed not to mine transactions on the OFAC blacklist and not to build blocks with such transactions. She also noted that having as much hashpower as possible in the United States, where miners must comply with sanctions, would help make that vision a reality.
“What we’ve noticed from our interactions with the industry this year is that compliance concerns have become much greater, especially in the second half of the year,” Hutten said.
Disclaimer: The Block is an independent media outlet delivering news, research and data. As of November 2023, Foresight Ventures is a majority investor in The Block. Foresight Ventures invests in other companies in the cryptocurrency space. Cryptocurrency exchange Bitget is an anchor LP of Foresight Ventures. The Block continues to operate independently to provide objective, impactful and timely information about the cryptocurrency industry. Below are our current financial disclosures.
© 2023 The Block. All rights reserved. This article is provided for informational purposes only. It is not provided or intended to be used as legal, tax, investment, financial or other advice.