As you’ll be aware from the plethora of stories about Bitcoin using more electricity than most countries, Bitcoin “mining” means throwing massive amounts of computer power at a mathematical puzzle, and the first computer to solve the puzzle finds the new bitcoins. Not everyone gets into Bitcoin mining just for the money though. The operator of a Bitcoin mining pool (a group of miners who work together to share the profits) quoted in CoinDesk says that some are investing for other reasons “such as to avoid capital controls or avoid sanctions”.
Some people mine Bitcoin for profits but some some people mine it for politics.
The Foundation for Defense of Democracies (FDD), a Washington think tank, summarised the emerging situation rather well in their position paper “Crypto Rogues”. They noted that “blockchain technology may be the innovation that enables U.S. adversaries for the first time to operate entire economies outside the U.S.-led financial system”. Now, while this may be technically slightly inaccurate (there are ways to create anonymous transactions without a blockchain and, indeed, the Swiss central bank has just published a working paper describing how to do so) it again flags up that the widespread availability of decentralised financial services threatens to bypass the existing infrastructure.
Iran provides an obvious example. The country already published a new set of regulations designed to funnel Bitcoin mined by Iranians to the state so that the country can use them to pay for imports. They have every incentive to want to try new approaches to skirt the long arm of American law. When the Iranian regime, for example, set up a venture to explore Bitcoin payments with a Swedish startup, the Swedish banks refused it a bank account because they themselves did not want to become subject to secondary sanctions. As America’s Treasury Secretary Mnuchin said at the time (talking about Iran), “If you want to participate in the dollar system you abide by US sanctions”.
On the other side of the world, North Korea has been developing a digital currency of its own. According to Alejandro Cao de Benós, President of the Korean Friendship Association, the Democratic People’s Republic of Korea intends to go down the Facebook route by creating an asset-backed digital currency rather than a digital fiat currency and then use some sort of blockchain with “Ethereum-style smart contracts” to do business and avoid sanctions. The regime sees this as a way to enforce deals it makes with foreign counterparties by developing a “token based on something with physical value” (eg, gold) in order to create a stable mechanism for payments in international trade between the regime and “other companies/individuals” (although it will not be available to individuals in the DPRK, who will be stuck with the Korean Won).
Across the Pacific in Venezuela, a country often mentioned by Bitcoin enthusiasts as a living case study of the benefits of decentralised cryptocurrency in the fight against tyranny, we find more mining going on: a video posted on Instagram by the 61st Battalion of the 6th Corps of Engineers of the Venezuelan Army shows military buildings converted into giant cryptocurrency mining centres and a warehouse that appears to be full of specialist Bitcoin mining equipment is labelled the “Center for the Production of Digital Assets”.
(I noted with interest that they do not appear to be mining “The Petro”, the digital currency of the revolution which according to the Bolivarian Council of Mayors’ recent “National Tax Harmonization Agreement” may soon be required for the payment of taxes.)
It seems to me that Bitcoin is a pretty poor choice for sanction-busting shenanigans though. Not only is the record of transactions public, but the Bitcoin value is not fungible. This matters. Remember that 2014 IRS Ruling about Bitcoins being a commodity, so that traders would have to track the buying and selling price of each individual Bitcoin in order to assess their tax liability? No? Here’s a reminder : “the real lesson from the IRS Bitcoin ruling is that for a currency-or any payment system-to work, its units must be completely fungible”.
Fungible (from the Latin “to enjoy” via Medieval Latin phrases such as “fungi vice”, meaning “to take the place of”) is one of my favourite adjectives. It means that all tokens are the same and can be substituted one for another. You owe me a quarter. It doesn’t matter _which_ quarter that you give me. Any will do. Any quarter can substitute for any other quarter because they are all the same. This isn’t true of Bitcoins. They are all different and their history can be tracked through the blockchain which is, as we are often reminded, and immutable public record of all transactions. As my good friend Marc Hochstein observed about this some time ago, blockchain’s openness could turn out to be a bug (even for law-abiding citizens).
The lack of fungibility has major implications for criminals. The English courts have ruled that crypto assets such as Bitcoin are considered to be ‘property’ capable of being the subject of a proprietary injunction against a cryptographic exchange. You can see what this means: exchanges will be required to identity who owns stolen coins and the owner will then be the subject of legal action to recover them. This owner might be entirely innocent about the origin of the coins and will say that they didn’t know that the Bitcoins they bought are the proceeds of a sanctions-busting and may ask to the keep them. But, J.P. Koning points out, that’s not how property law works. Even if you accidentally come into possession of stolen property then a judge can still force you to give them back to the rightful owner.
My Bitcoin Launderette.
Smart money launderers may well try to use “mixers” or “tumblrs” that jumble together Bitcoins to obfuscate their origin but I don’t think this will help in the long run. What if law enforcement agencies go to the biggest miners in the world and tell them that if they continue to confirm easily identifiable mixing transaction outputs, they will be accused of money laundering? This is not difficult to imagine, which suggests to me that Bitcoin’s lack of fungibility has serious implications.
In the mundane world of dollar, dollar bills we have the concept of “money laundering” to describe what happens when dirty money is mixed with clean money (surely every one of us has touched banknotes that have been involved in some criminal activity!). But this doesn’t work for bitcoins. The “tainted” money stays tainted.
This has not gone unnoticed in the United States. Two of the largest Bitcoin mining companies there, Marathon Patent Inc. MARA -1.6% and DMG Blockchain Solutions Inc. (which together account for about a one-twelfth the power of the Bitcoin networks), recently joined forces to create the Digital Currency Miners of North America (DCMNA). This not-for-profit trade association has come up with pretty interesting idea: their miners will only process transactions that comply with American laws, thus extending the benevolent embrace of the U.S. Government into cryptocurrency. The idea (known as “clean mining”) is that instead of selecting transactions on the basis of which ones will bring the biggest fees, they will mine transactions based on the wallets that they come from.
A member of the Catalan regional police force Mossos d’Esquadra holds a wad of banknotes seized … [+]
We could well see a strange and interesting twist in the world of cryptocurrency that has no analog in the analogue world of notes and coins: black and white money, or clean and dirty money, or light and dark money (an idea that goes back to the earliest days of cryptocurrency) in which some bitcoins will be worth more than others! Maybe a year or two from now, exchanges will be quoted two BTC-USD pairs: clean BTC at $100,000 and dirty BTC at $75,000.
As you may have noticed over at your local bureau de change, this doesn’t happen for GBP-USD or JPY-GBP, which makes me think that whatever Bitcoin is, it isn’t money.
An internationally-recognised thought leader in digital identity and digital money named one of the global top 15 favourite sources of business information by Wired