User Error Doesn't Mean Bitcoin Is Censorable

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To investors,

Last week it was reported that Bitcoin transactions played a role in the takedown of the world’s largest dark web child sex abuse website, including the arrest of 300+ individuals in more than 38 countries. These arrests, and the shut down of the dark web website, were made possible because law enforcement traced Bitcoin payments between individual visitors of the website and the website’s operators.

As most of you know, every Bitcoin transaction is recorded on a public ledger and includes the sender’s digital wallet address, the recipient’s digital wallet address, the amount of Bitcoin transacted, and other important information. Here is an example:

It should be immediately obvious that the transaction information available here doesn’t have anyone’s name or location. That doesn’t mean that law enforcement can’t find the sender or recipient’s identity though. Some of the more popular ways to link an identity to the random string of letters and numbers (input or output addresses) is to locate a traditional bank account that is linked to the address, locate a cryptocurrency exchange account that is linked and has been put through KYC/AML, or to follow the flow of funds through the chain of transactions until it hits an account with an identity linked.

While the exact details of the child sex abuse ring bust are unclear, we do know that law enforcement organizations across the world were able to identify hundreds of individuals to arrest.

There are numerous ways to look at the various aspects of this news. You could argue that it is horrible that someone can use Tor to increase their anonymity enough to create a dark net website that exploits young kids. You could argue that Tor is actually not as anonymous as people think, especially when there is user error involved when trying to conceal an identity. You could also argue that it is a really bad headline for Bitcoin that these criminals decided to use the digital currency as their choice currency for these activities. Or alternatively, you could argue that it is encouraging that Bitcoin’s public ledger was able to serve as a tool for law enforcement to catch and stop these criminals.

The situation is complex, so none of these arguments are right or wrong. They all have elements of truth to them though. But one argument that I heard last week was really concerning. Normally I wouldn’t take the time to address the fear mongering that has become rampant around Bitcoin, but these ideas were being spread by people with large audiences, so I felt it was appropriate to respond.

The (flawed) argument goes like this:

  • Bitcoin’s only unique value proposition is non-censorability

  • In order to have non-censorability, you have to have full anonymity of users

  • Since the users of Bitcoin in this situation were identified and caught, there is no anonymity with Bitcoin

  • If Bitcoin has no anonymity, than it can be censored

  • And if Bitcoin can be censored, than it is worthless because the only unique value proposition is non-censorship

This argument is flawed circular reasoning at best and intentional misinformation at worst. In fact, the individuals pushing this argument last week are likely trying to use complexity to capitalize on the fact that their audience is relatively uninformed about the nuances of Bitcoin. As has become all too familiar in the mainstream media, the use of big words, a little outrage, and long paragraphs is infallible proof that the writer has to be accurate, right?? ;-)

Lets take a more in-depth look at this argument.

To start, the entire premise of the argument (Bitcoin’s only unique value proposition is non-censorship) is invalid. Bitcoin is a non-censorable, non-seizable, non-debasable, digital currency that has a fully transparent monetary policy and transaction history, while also boasting a known, artificially capped supply. In layman terms, Bitcoin’s non-censorable characteristic is only one of many value propositions. To argue the contrary is simply ridiculous.

But make no mistake about it. The inability for governments, financial institutions, or other organizations to censor Bitcoin transactions is really important. It is one of the most important characteristics of the asset, but it is not the ONLY one.

The next step in this argument is that anonymity is needed to circumvent censorship. This is directionally correct. If the sender and receiver of a transaction are easily identifiable, third parties can easily step in through a variety of methodologies (both digital and non-digital) to stop transactions. Thankfully, Bitcoin provides full anonymity when used correctly — emphasis on “when used correctly.”

This brings us to the third point. The people pushing this false narrative are applying a faulty mental model by saying “since users of Bitcoin in this situation were able to be caught, there is no anonymity with Bitcoin.” That statement is reliant on the idea that everyone uses Bitcoin the same way and that in no circumstance could Bitcoin provide anonymity. Think about physical US dollars — you have full anonymity when you use them to make a direct purchase from an individual or a business.

The recipient doesn’t know who you are unless you tell them. But if you fill out a purchase order with your name, they know who you are. If you sign a receipt, they know who you are. Or if you deposit your physical cash in a bank before trying to spend it somewhere, then they know who you are. So if your goal was to use physical cash for anonymity, you could definitely do it. But you could also easily do a number of things that would reveal your identity even though you were using physical cash.

This trade off is simple. Do you want security (anonymity) or convenience? Many times you can’t have both, so you have to choose.

This is essentially what happens with Bitcoin too. If you desire to use Bitcoin in a fully anonymous way, you can do that. It would require you to have the education on specific steps to take, along with a decent amount of planning required to ensure that you gained possession of your Bitcoin, stored them, and then spent them without revealing your identity at any step of the process. If you make a mistake and reveal your identity during one of these steps, it doesn’t mean that Bitcoin has no anonymity. It means that the person using Bitcoin didn’t properly protect their anonymity.

Which brings me to the last point. Bitcoin is valuable for many reasons. The ability to resist censorship from the most powerful organizations is one of the most important characteristics. And as the world begins to understand the importance of financial privacy, it is highly probable that Bitcoin is wildly underpriced today.

Personally, I can’t think of another asset that combines a lack of censorability, a lack of seizurability, and a lack of debasement together. Add in the fully transparent monetary policy and transaction history to get an unique, scarce asset that is poised to disrupt the core unit of value around the world.

But many of you will ask — Is it a good idea to have a fully anonymous digital currency?

I don’t believe it is any different than the digital cash system that currently exists. Bitcoin takes the idea of peer-to-peer transactions (ex: handing physical cash to someone) and makes it globally scalable, regardless of geography or environment. And to take it one step further, most law enforcement agencies would tell you that they would prefer criminals conduct crimes with their hands on a keyboard, rather than with physical cash.

This presents an interesting situation moving forward.

Law enforcement will work to drastically improve their ability to track transactions on the Bitcoin network, so they can increase their surveillance under the promise of preventing criminal activity from occurring. And Bitcoin companies will continue working to materially reduce the friction that currently exists when people try to use Bitcoin anonymously. It is unlikely that either side will accelerate their mission at a pace that will leave the other side in the dust. Instead, we are likely to see a constant battle between privacy-focused folks and law enforcement / governments. 

With all that said, there is one major part of this story that needs to be clearly stated — just because someone wants to use Bitcoin (or any currency) anonymously, doesn’t mean that they are doing anything nefarious or breaking the law. There must be some level of financial privacy enjoyed by individuals. It is scary to think that the foregone conclusion for our future world is that we will all live in a cashless society, where governments can see everything we do and decide how to use that information against us as they see fit.

Bitcoin was built to fight back against tyranny, ignorance, and incompetence. It was built as a peaceful protest. The digital currency delivers on it’s promise in a variety of ways — from leveraging a deflationary structure to circumvent the systematic stealing of wealth from the poor by elites to the anonymity and decentralization required to ensure that overreaching governments and organizations can’t seize or censor free individuals.

Simply, Bitcoin’s pure existence has opened the eyes of tens of millions of people to the potential world that we don’t want to move towards and it has provided them with an alternative option that allows them to peacefully ensure they participate in a different world. A world where the default is financial privacy for everyone.

While I appreciate that the mainstream media has taken an interest in Bitcoin, it is important that we hold them accountable when they write provably false information. It is one thing to argue that it is easy to (accidentally) reveal your identity while using Bitcoin, but it is irresponsible to argue that Bitcoin has no anonymity and therefore no ability to resist censorship.

We should hope the criminals are too dumb to learn how to use Bitcoin correctly, while the average person is provided user friendly tools and infrastructure to preserve their financial privacy.

-Pomp


The “Off The Chain” podcast has been downloaded in every country in the world, with more than 1,500,000 combined downloads. You can listen to the latest episode with Mark Yusko, Founder & CIO at Morgan Creek Capital Management here: Click here for Off The Chain podcast


THE RUNDOWN:

Facebook’s Libra Is ‘Neat Idea That’ll Never Happen,’ Dimon Says: Count the chief of the biggest U.S. bank among doubters of Facebook’s effort to create a cryptocurrency. “It was a neat idea that’ll never happen,” JPMorgan Chase CEO Jamie Dimon said on a panel at a conference hosted by the Institute of International Finance in Washington. Dimon said the idea wasn’t particularly unique and pointed to his own firm’s stablecoin, JPM Coin. Read more.

Telegram Warns of Losses Unless Crypto Investors Agree to Delay: Telegram Group Inc. is telling investors who helped fund the creation of its digital token that they’ll only receive 77% of their money back unless they agree to postpone the launch of the cryptocurrency for six months. Pavel Durov’s Telegram raised $1.7 billion in early 2018 to fund creating its own cryptocurrency Gram and blockchain infrastructure to operate it. It was scheduled to deliver tokens to investors by Oct. 31. The SEC halted the process last week, arguing that Gram is essentially a security that wasn’t properly registered. Read more.

Fidelity Digital Assets Opens to All Qualified Investors: Fidelity is ramping up its cryptocurrency custody business, hoping to profit from the scarcity of big, regulated institutions in the chaotic world of digital assets, according to Abigail Johnson, the investment group’s chief executive. The Boston-based financial group, which has $2.8tn of assets under management, announced the launch of Fidelity Digital Assets last autumn, promising “enterprise-quality custody and trade execution services” for hedge funds, family offices and financial advisers dabbling in cryptocurrencies. Read more.

Circle to Spin Out Poloniex Less Than 2 Years After $400 Million Takeover: Crypto exchange Poloniex is spinning out from its parent firm Circle. Poloniex will now become Polo Digital Assets, Ltd., an “independent international company” backed by an unnamed Asian investment firm. The trading platform will not serve U.S. customers after this year. U.S. residents have until Dec. 15, 2019 to withdraw their assets, with all trades being suspended on Nov. 1, 2019, the blog post said. Read more.

HTC’s Latest Blockchain Phone Can Run a Full Bitcoin Node: Taiwanese electronics manufacturer HTC has launched its latest blockchain phone, the Exodus 1s, which enables users to support the bitcoin network. Unveiling the device Saturday at the Lightning Conference in Berlin, the company claimed the new product is the first smartphone to be able to run a full bitcoin node, allowing it to propagate transactions and blocks anywhere. “Full nodes are the most important ingredient in the resilience of the Bitcoin network and we have lowered the barrier to entry for any person to run a node,” Phil Chen, chief decentralized officer at HTC, said.Read more.


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LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE


Emily Parker is the Co-Founder of Longhash. She previously spent time as a journalist at a number of mainstream publications, before creating her company as a “gateway to Asia” for Western investors and entrepreneurs. It is always fun to talk with people who have unique insights and Emily really understands the Asia markets, including Japan, China, and Singapore.

In this conversation, Emily and I discuss:

  • How journalism has changed over time

  • What the day to day schedule of policy scheduling staff looks like

  • How power is no longer a top-down phenomenon

  • What internet censorship in China really looks like

  • How Longhash is trying to serve as a gateway to Asia

  • What exactly data journalism is

I really enjoyed this conversation with Emily. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE


Interested in crypto research? Look no further. The premier research firm in the space, Delphi Digital, has two subscription offerings for individuals and institutions alike. Take a look at their Bitcoin and Ethereum reports to get a taste of their analysis. [Click here]


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Nothing in this email is intended to serve as financial advice. Do your own research.