Bitcoin's Fungibility Issue

[titular]

For those not familiar with what it means for something to be fungible, it refers to how interchangeable individual units of a commodity or good is.

Your Bitcoin is the same as my Bitcoin. My gold bar is the same as your gold bar.

For the longest time, I had always viewed Bitcoin as a perfectly fungible store of value. As I continue snooping the forum however, it seems that many members aren't so sure.

Bitcoin that has been 'tainted' by illicit activity has allowed exchanges to flag (and possibly freeze) any Bitcoin they deem to not be clean. Something as simple as using mixing services, coinjoin transactions, or other anonymity features is enought to have your Bitcoin flagged. Obviously, this poses a major issue, a fungibility issue. Now, my Bitcoin is not the same as yours. Mine is "tainted", while yours is "clean". This undermines the entire definition of fungibility.

I hate to come with a problem and not a solution..but I beg the question(s)..

What do we do about this?

Are there people actively trying to fix this?

Is this something that can be fixed by devs or is this a political game?

What do you do with "tainted" coins? Use a DEX and exchange back for a new set of coins?

Is this all just a bunch of nonsense and nothing to worry about?


If you recall any good discussion on this topic somewhere on this forum please drop a link.

[songchunlai]

The stolen gold and silver are like gold and silver, which is the personal behavior of the exchange. They should be returned the same way instead of seized.

[franky1]

a regulated bitcoin exchange cannot just freeze someones account and say "sorry we keep your coinz coz taint"

a regulated exchange will still process transactions and give people their funds. but if they have un-deniable proof that something illicit has occured they have to report it.. whilst still letting you have access to your funds.

only after a authority has got a court order, then and only then can an exchange [steal] freeze the coins

all an exchange can do without a court order is:
offer a withdrawal method with a notice you are no longer able to deposit/use their service again

its like banks.
if they cannot prove your legit they either continue servicing you and keep an eye on your activity. or stop servicing you and give you a closing account cheque to take your money elsewhere.
they cannot just hold onto it and steal it untill they have a court order

any bitcoin exchange holding funds without proof or court order is breaking the law. (many small unregulated exchanges pretend they are holding onto funds due to suspicious activity but really they are just robbing their customers(breaking the law themselves))

[TheUltraElite]

Blockchain forensics can track tainted coin sources and if they are working under government orders, the information will be passed to exchanges and they will be taking steps to prevent such users from accessing their coins on that exchange. It is common to use mixers, casino hot wallet and exchanges in an attempt to throw pursuers off track.

Now your question is valid, but it depends on who is asking the question:

1. If you are looking to launder money, you will get caught, maybe not today not tomorrow but one fine day you will be caught and you will face the music.

2. If you are a common user, then you do no need to worry about it. Till date I dont think the community has seen any legal battle of an innocent person being accused of being a money launderer due to tainted coins ending up in their pocket.

3. If you learn that you are owning tainted coins, you should approach the legal route and inform the law enforcement. You never know you might have been sent stolen coins from someone's life savings and you could end up saving someone's life.

I have seen a lot of complaints come in to the "Scam Accusations" section of this forum with users claiming that the casino shut them off but not saying the reality of having sent tainted coins. The casino needs to protect itself and therefore their TnC are valid here. Eventually such threads never get any response from the complainant and die out.

As far as devs go, how people use coins and what they use it for, is their choice, no relation to the devs. You dont accuse the mint for the use of money - do you?
Do correct me if I am wrong, these things are less known to me too.

[avikz]

If bitcoin remained as an underground currency system like it was during its initial days - such issues wouldn't have popped up! However,  since bitcoin is trying to become a mainstream internet currency, it obviously has to follow certain rules and regulations. So this issue is popping up over and over again because now regulatory bodies are seeking information on illegal trades using bitcoin. There are blockchain analysis companies built around such needs like Chainanalysis.

So it's entirely a political game, I would say! When a certain commodity or asset becomes immensely popular, many unwanted eyes usually starts to look at it and brings in eventual problems. The more popular it becomes, the more negative attention it draws. That's it! I see such issues will increase gradually because bitcoin is on the path to growth, so ancillary issues will keep on happening!

[pooya87]

Your Bitcoin is the same as my Bitcoin. My gold bar is the same as your gold bar.

Bitcoin IS fungible and the fact that some centralized entity decides to target random individuals and discriminate against them doesn't change this fact.
Since you used gold let me give you an example, where I live if you want to sell gold they will ask for a receipt to prove you have indeed bought this gold and when and if you can't, they won't buy "your gold". So with that logic you should say that gold is not fungible!

Bitcoin that has been 'tainted' by illicit activity

First of all every currency in the world is "tainted by illicit activity" but you never hear about thing about discrimination against those currencies!
Secondly the usage of bitcoin in any kind of illicit activity or the ratio of illicit versus non-illicit activities is too small that it is negligible. Discrimination by centralized exchanges has a different reason.

has allowed exchanges to flag (and possibly freeze) any Bitcoin ~ Now, my Bitcoin is not the same as yours. Mine is "tainted", while yours is "clean". This undermines the entire definition of fungibility.

Here is another fundamental problem with your whole arguments. You are focusing on exchanges but bitcoin is not even supposed to be used in exchanges! Bitcoin is a currency meant to be used for payments and your measurement of "fungibility" should be based on that not what CEXes do.

What do we do about this?

Stop using bitcoin as a trading tool and instead use it as it was meant to be used, meaning as a currency.

[Upgrade00]

3. If you learn that you are owning tainted coins, you should approach the legal route and inform the law enforcement. You never know you might have been sent stolen coins from someone's life savings and you could end up saving someone's life.

The word tainted here is not used entirely in context, it doesn't directly mean the coins are smeared with illegal activity, it could simply be that the user is privacy conscious ad uses a mixer to avoid traces between wallets or to their real identity, and I should not be forced in this case to inform any agency of my activities, especially as privacy was the main purpose of it.
Avoiding centralized exchanges seems a better option.

I have seen a lot of complaints come in to the "Scam Accusations" section of this forum with users claiming that the casino shut them off but not saying the reality of having sent tainted coins. The casino needs to protect itself and therefore their TnC are valid here. Eventually such threads never get any response from the complainant and die out.

Casinos can choose to protect themselves, but they should not steal users funds, cause they assume it's tainted.

[mk4]

This unnecessary "tainted" bitcoin thing is just going to be a totally temporary thing. At some point in the future, bitcoins would have been exchanged with so many hands/addresses that the previous sort of "taint" wouldn't matter. The same way how the cash in your wallet could've been stolen by a thief some time in the past, but it doesn't matter.

[crwth]

Those taints, just like what mk4 has said, are only temporary. People who have a lot of power over cash don't want something to replace the fiat currency because of its unlimited supply (with the unlimited printing) and don't think about the economy with the inflation thing. But once the value of fiat continuously decreases, that's definitely one reason to go the other route which is cryptocurrencies, most definitely BTC.

It's not an issue, to be honest. It's just the way of destroying the image of BTC and make people still believe in fiat, which they shouldn't. They'll just lose money.

[NeuroticFish]

What do we do about this?

Basically after the tainted coins move a couple of times, get combined with other coins - tainted or not - and time passes too, even the pickier ones should no longer consider them tainted.
Mixers break the link between the source and the new coins, but the risk is high that the result is considered tainted by default, again, by the pickier ones.
Bitcoin has this problem by design and the only evolution is that more and more circulating coins have the potential to become tainted, hence the pickier ones will have to drop their requirements.
I don't know what's to be done in bitcoin for this. The only solutions I see is either switch to anonymous coins (different coin, network, price, risks) or find an exchange that's not picky when you want to sell.

[dkbit98]

Your Bitcoin is the same as my Bitcoin. My gold bar is the same as your gold bar.

Two gold bars are not always the same because of some impurities and you can't even know if you are holding real gold bar or some cheap metal with golden layer.
You would need special instruments for that, you would have to try and break it or take it to some gold dealer and trust his judgement.
There are even some scientists from China and few years ago they turned copper into a material that is almost identical to gold

Is this something that can be fixed by devs or is this a political game?

Adding privacy option by default on Bitcoin with new fork would stop any talk about btc fungibility, but this would probably create bunch of other problems with regulators.
I don't think we should judge any bitcoin by it's past transactions, in the same way like we don't judge gold even if it was related with some crime, melted and then turned into gold bar.

[Ucy]

In my opinion, a tainted coin has to be proven to be tainted if is used for dangerous crime otherwise a mere claim of being tainted without strong proof could be ignored by other users and the exchange that tagged it sanctioned or punished.
As fungible as gold is, if you are caught using it for serious crime, I expect that it will be seized and marked as crime money/gold and it loses it fungibility or cease to being fungible

[cr1776]

What pooya87 said, plus there are technical solutions in the works to improve privacy and tracking, hence limiting the ability of centralized services to track specific inputs and outputs.  It can't come soon enough.

[SquirrelJulietGarden]

The bullish case for Bitcoin

This article is long but it is one of good articles for newbies to start. You must read it if you are newbies and are still vague about Bitcoin, what it can provide and how it can survive as well as you can see the comparison between Gold and Bitcoin.

When Bitcoin has longer history, it won't disappear to anywhere and its value will increase. More recognition, more use cases, more adoption and Lindy effect will be bigger with time.

[Similificator]

Although this may be a frightening problem, I really haven't heard any case about something like this happening myself. There have been several hacks and fund freezing but not about an innocent person having his/her funds being frozen just like that. A possible hassle for questioning and other process for verification of sources but this rarely even happens. So I think we can safely assume that exchanges wouldn't be freezing funds just like that without valid reasons that are backed by solid proof. I'm not singling out the possibility though, just that it is nearly impossible to happen, and would absolutely undone if it happened to be just misunderstanding. That is, if they don't want to tarnish their reputation.

[BlackHatCoiner]

Bitcoin IS fungible and the fact that some centralized entity decides to target random individuals and discriminate against them doesn't change this fact.

Actually, that fact is what defines fungibility. If some people don't want your currency while they're supposed to accept it, then it faces fungibility issues. When a government forces the exchanges to trace transactions that are connected with illicit activity and to deny the acceptance of those bitcoins, then they've essentially lost value, because compared with the rest, they aren't demanded from the X exchange.

Since you used gold let me give you an example, where I live if you want to sell gold they will ask for a receipt to prove you have indeed bought this gold and when and if you can't, they won't buy "your gold". So with that logic you should say that gold is not fungible!

But, gold isn't a currency.

First of all every currency in the world is "tainted by illicit activity" but you never hear about thing about discrimination against those currencies!

Cash is much more fungible. Monero is fungible.

Here is another fundamental problem with your whole arguments. You are focusing on exchanges but bitcoin is not even supposed to be used in exchanges!

Exchanges aren't used only as wallets for some. They're used to buy cryptocurrencies. You're allowed to withdraw bitcoins to your non-custodial wallet, but if your deposit isn't going to be accepted in certain cases, then it's most likely a fungibility issue.

[add1ct3dd]

I have always had this thought about tainted bitcoins: when bitcoins becomes tainted, do they remain tainted for good and not get clean or does exchanges seize them and then resell them for them to become clean again? Because, I guess that’s the only way it can get clean, because if you put it on coins mixers it’s just going to get worse. Although I do understand the fact that this is for own good in a way, because this will be a way for them to be able to keep track and know bitcoins that were gotten through negative means.

Well, I guess that’s what you have to face when you have anonymity. If you’re not going to do this then people who do bad things to get their coins will go scot free. But then at the same time this is affecting the good guys, because if you use a peer to peer means to buy coins, you wouldn’t really know whether they are tainted or not.

[Hippocrypto]

Fungibility is not a binary property of money; certain goods can be more or less fungible than others. In my opinion, a tainted coin has need to be proven  if is used for dangerous crime otherwise a mere claim of being tainted without strong proof could be ignored by other users and the exchange that tagged it sanctioned or punished. Although, this is not a frightening problem, I didn't heard that anybody experienced this or even having this kind of case.  As to two gold bars, they are not always the same because of some impurities and you can't even know if you are holding real gold bar or some cheap metal with golden layer. I expect that it will be seized and marked as crime money/gold and it loses it fungibility or cease to being fungible

[pooya87]

Actually, that fact is what defines fungibility. If some people don't want your currency while they're supposed to accept it, then it faces fungibility issues. When a government forces the exchanges to trace transactions that are connected with illicit activity and to deny the acceptance of those bitcoins, then they've essentially lost value, because compared with the rest, they aren't demanded from the X exchange.

My argument is that what a certain centralized entities do, does not define the attributes of that object.

Let me give you another example. Where I live we had a big inflation about 2.5 years ago and during that time many people started exchanging their cash for USD, some time later they sold it. One problem some people faced was that some exchanges didn't accept dollar bills that had an old date.
So with OP's logic we should claim that US dollar (cash) is not fungible which makes no sense! Not to mention that they could dump their USD elsewhere that didn't have that dumb rule.

If you go to a grocery store you can pay with any "coins" you have in your wallet regardless of its "imaginary taint".
If I lend you 1BTC you don't have to pay me the same coins, you can use a different set of UTXOs to pay the 1BTC back.
If you have 1BTC it can be split into the same smaller denomination as any other 1BTC
That means BTC is fungible.

Now if you go to a centralized exchange and deposit some coins that exchange can suddenly decide that it doesn't want to give any services to your country and block your account and money (see it had nothing to do with "taint", etc.) but that doesn't change anything about fungibility of bitcoin.

[davis196]

Why do you have to compare Bitcoin to gold.Why don't you compare Bitcoin to fiat money.
Fiat money can also be "tainted". That's why money laundering exists.It existed way before Bitcoin was made.
Like other the forum members said,Bitcoin is still perfectly fungible.It's the government regulations,that are dividing Bitcoin/altcoins into "clean" and "dirty".Financial crimes and money laundering have to be fought.
What's the solution for this problem?Well,just don't get involved into financial crimes and try not to use Bitcoin mixers.If you don't have anything to hide,then why would you use a Bitcoin mixer at the first place?