OFAC-Sanctioned Transactions Being Censored

[mrust_mobile]

The major problem is converting between real crypto and CBDCs (and other government-controlled electronic money) at the same time preserving the anonymity of the real crypto wallets and the anonymity of the crypto transactions. I have been thinking about it and it seems that there are various ways to organize this conversion between real crypto and CBDCs as long as the users are allowed to transfer freely CBDCs (or other government-controlled money) from one government-controlled wallet to another without significant cost, i.e. minimal or no government taxes for such transfers. I think that if this problem is solved, then the remaining problems will be solved too.

That too.

Everybody hates FIAT but physical FIAT is a wonderful thing. Only a few realize that. Once paper money is gone, we are fucked.

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[Abiky]

Nothing, of course, except they might decide that doing so is illegal. The AOPP protocol wasn't designed to make every wallet undergo KYC at source though, but rather require that centralized exchanges attach your KYC to your withdrawal addresses by having you sign a message from it prior to withdrawal.

Well that's a relief. If it's only enforcing KYC through centralized exchanges, then you can switch to a P2P or DEX exchange for true privacy. We should stick with open source wallets and decentralized exchanges to avoid failling into the hands of the government. Regulations are getting strict, especially when Bitcoin's popularity is increasing at a fast pace.

I've been doing a little research and found out a private alternative to the Lightning Network called "Ark". There isn't a working product (as far as I know), but the project is very promising. You might be able to "anonymize" your BTC with this off-chain scaling solution in a trustless manner. There are also trusless cross-chain atomic swaps that will eliminate the need for CEXs in the future. With development happening behind the scenes, it seems to me that not all hope is lost.

[serveria.com]

The major problem is converting between real crypto and CBDCs (and other government-controlled electronic money) at the same time preserving the anonymity of the real crypto wallets and the anonymity of the crypto transactions. I have been thinking about it and it seems that there are various ways to organize this conversion between real crypto and CBDCs as long as the users are allowed to transfer freely CBDCs (or other government-controlled money) from one government-controlled wallet to another without significant cost, i.e. minimal or no government taxes for such transfers. I think that if this problem is solved, then the remaining problems will be solved too.

That too.

Everybody hates FIAT but physical FIAT is a wonderful thing. Only a few realize that. Once paper money is gone, we are fucked.

Yeah, that is 100% so. Unfortunately, some countries, like EU member states for example are tightening the laws regarding cash. In some countries like Sweden, cash is almost not used at all.

I think that cash is one of the pillars of democracy, privacy and freedom. Any efforts to eliminate cash should be illegal. 

[btcinfo891]

Everybody hates FIAT but physical FIAT is a wonderful thing. Only a few realize that. Once paper money is gone, we are fucked.

Cash (i.e. physical FIAT) has two essential properties

- Anonymity. In the general case it is not possible to find out who owns a given coin/banknote at the moment. Nobody knows what transactions are performed except for their participants.
- Zero cost and unblockable transactions. It does not cost anything for user A to give any amount of cash to user B and it is very difficult for a third party to block a transaction between A and B.

Both properties are nice to have but one might argue that the second one is more important. When the CBDCs are introduced they will not have anonymity but if they allow (almost) zero-cost transactions between arbitrary users A and B, then it is possible to allow conversion between CBDCs are real crypto (e.g. Monero) at (almost) zero cost and still keep the pure crypto transactions anonymous.

CBDCs are a big problem and the crypto community better start thinking how to work around that problem, otherwise in 10 years we will live in a totalitarian world with CBDCs and non-anonymous, KYCed, government-controlled "crypto".

Well that's a relief. If it's only enforcing KYC through centralized exchanges, then you can switch to a P2P or DEX exchange for true privacy. We should stick with open source wallets and decentralized exchanges to avoid failling into the hands of the government. Regulations are getting strict, especially when Bitcoin's popularity is increasing at a fast pace.

The next logical step after enforcing KYC for all financial institutions (including CEXes) is to prohibit KYCed wallets from transacting with non-KYCed wallets. This will cause the KYC to spread like an infection over crypto wallets. It is an obvious step and sooner or later the governments will do that. This will effectively split the crypto wallets into two non-communicating groups of KYCed and non-KYCed wallets. That is why I said that we need to find a working solution to exchanging CBDCs/KYCed crypto with non-KYCed crypto. That's the main problem.

[o_e_l_e_o]

The next logical step after enforcing KYC for all financial institutions (including CEXes) is to prohibit KYCed wallets from transacting with non-KYCed wallets.

This is already happening. There have been a whole bunch of centralized exchanges saying they will only allow deposits or withdrawals to other TRUST entities. TRUST stands for the Travel Rule Universal Solution Technology, and is essentially a list of fully centralized fully KYCed services which report everything to the US or other respective government. So not only can you not transact with non-KYCed services, but you can't even withdraw you coins to your own wallet.

Soon you will have government approved KYCed bitcoin which is bought, held, and sold only on centralized exchanges and used only to chase fiat gains, and then you will have all bitcoin which is held in your own wallets and not in the custody of a centralized exchange, which you can use for anything you like but which the government will treat as criminal and malicious. This split has already begun, and very few of us seem to care.

[apogio]

The next logical step after enforcing KYC for all financial institutions (including CEXes) is to prohibit KYCed wallets from transacting with non-KYCed wallets.

This is already happening. There have been a whole bunch of centralized exchanges saying they will only allow deposits or withdrawals to other TRUST entities. TRUST stands for the Travel Rule Universal Solution Technology, and is essentially a list of fully centralized fully KYCed services which report everything to the US or other respective government. So not only can you not transact with non-KYCed services, but you can't even withdraw you coins to your own wallet.

Soon you will have government approved KYCed bitcoin which is bought, held, and sold only on centralized exchanges and used only to chase fiat gains, and then you will have all bitcoin which is held in your own wallets and not in the custody of a centralized exchange, which you can use for anything you like but which the government will treat as criminal and malicious. This split has already begun, and very few of us seem to care.

It is indeed happening. The question is, how will we be able to use our bitcoin if most of the people suddenly decide to use bitcoin in a government-approved manner. I mean we wanted bitcoin to be free for everyone, without any intermediaries. We wanted to get rid of all of this centralised manipulation.

Now, I am worried more than ever. If I want to buy something from an online store, will my bitcoin be rejected, just because I didn't buy it from a CEX?

[o_e_l_e_o]

The question is, how will we be able to use our bitcoin if most of the people suddenly decide to use bitcoin in a government-approved manner.

I always thought this scenario was an "if", and that more people would be disgusted by this behavior and do something about it. Given how little everyone seems to care, I worry this scenario is now a "when".

I've never had a problem yet with having bitcoin refused or seized, but I also don't use any centralized exchanges. However, to say I am not concerned about this kind of privacy invading behavior spreading to merchants and affecting me in the future would be a lie, especially with the news of mining pools now excluding so called "blacklisted" transactions. The day I can't spend my bitcoin without completing KYC is the day I trade all my bitcoin to monero, I'm afraid.

[Medusah]

Bad news.  Now Samourai's whirlpool is censored:  https://nitter.cz/SamouraiWallet/status/1732584009442443336.

[apogio]

Bad news.  Now Samourai's whirlpool is censored:  https://nitter.cz/SamouraiWallet/status/1732584009442443336.

F...

This is real? I mean did Jack Dorsey and Luke Dash really do that?

I am seriously sick of this action. What is their motive? Please enlighten me, what do they have to win taking this measure?

[o_e_l_e_o]

Knots sets the upper limit of OP_RETURN data to 42 bytes. Core sets it to 83 bytes.

Whirlpool Tx0s create an OP_RETURN output larger than 42 bytes (but less than 83 bytes), so Knots sees them as invalid. Since this Ocean mining pool is based on Knots, it will not mine these transactions as it sees them as invalid.

[NotATether]

Knots sets the upper limit of OP_RETURN data to 42 bytes. Core sets it to 83 bytes.

Whirlpool Tx0s create an OP_RETURN output larger than 42 bytes (but less than 83 bytes), so Knots sees them as invalid. Since this Ocean mining pool is based on Knots, it will not mine these transactions as it sees them as invalid.

So it's not really a censorship, it's just bad coding by Bitcoin Knots. It would've been a bit surprising if these high-profile people suddenly started going on a tirade against coordinators, after all the events that happened here.

But lets be realistic here - what percentage of network hashrate does Ocean pool have? I would be surprised if its even at 5%.

[Medusah]

I am seriously sick of this action. What is their motive? Please enlighten me, what do they have to win taking this measure?

Luke runs Bitcoin Knots, in which he has defined OP_RETURN limit to 42 bytes.  Why would he want to do that tho, the limit has been 80 bytes since 0.12:  https://github.com/bitcoin/bitcoin/blob/2e8ec6b338a825a7155fff1be83993e3834ab655/src/policy/policy.h#L72.  Their mining pool will probably ignore lots of transactions.

[o_e_l_e_o]

So it's not really a censorship, it's just bad coding by Bitcoin Knots.

But it's a prime example of why trying to ban ordinals is a mistake. You will absolutely end up banning other legitimate use cases, while the ordinals can easily move their arbitrary data to elsewhere where it is impossible to ban.

But lets be realistic here - what percentage of network hashrate does Ocean pool have? I would be surprised if its even at 5%.

A tiny amount. This censorship from Ocean will be irrelevant to Whirlpool, but it's a terrible precedent to set and governments will absolutely latch on to this as more proof that mining pools can censor at will.

[cryptosize]

Cash (i.e. physical FIAT) has two essential properties

- Anonymity. In the general case it is not possible to find out who owns a given coin/banknote at the moment. Nobody knows what transactions are performed except for their participants.

This is partly true.

Banknotes (not coins) have serial numbers. Why? Because this allows them to have (limited) traceability.

If you ever get a banknote from a bank robbery, abduction etc and the serial number of it is marked as "tainted", then you will have a huge problem if you try to deposit it in a bank.

It's the same thing with tainted BTC (from MtGox, Silk Road etc.) and CEX (crypto banks).

Also, they may introduce additional tracing technology, in case the masses want to retain cash at all costs:

https://www.fleur-de-coin.com/eurocoins/banknote-rfid
https://www.eetimes.com/euro-bank-notes-to-embed-rfid-chips-by-2005/

[cryptosize]

But it's a prime example of why trying to ban ordinals is a mistake. You will absolutely end up banning other legitimate use cases, while the ordinals can easily move their arbitrary data to elsewhere where it is impossible to ban.

IMHO, it was a mistake on Satoshi's part designing Bitcoin is such a way to also include arbitrary data (i.e. the bank bailout message), not just financial transactions.

If I had it my way, BTC's blockchain would store ONLY financial transactions (this is possible with Mimblewimble which makes the blockchain very lightweight, i.e. BEAM, GRIN) and there would be a separate, optional blockchain (sidechain if you will) to store text messages, photos, audio files, videos (even DVD movies) etc.

Unfortunately it's too late to do that, nobody will accept a hard fork.

[serveria.com]

Bad news.  Now Samourai's whirlpool is censored:  https://nitter.cz/SamouraiWallet/status/1732584009442443336.

This is the direct continuation of the initial topic opened by the OP.

I bet Uncle Sam is holding Jack by the balls so he decided to make up some vague technical reason why they can't  process coinjoin transactions. Probably a call from some 3 letter agency saying "stop processing these transactions or we'll stop you". 

[apogio]

So it's not really a censorship, it's just bad coding by Bitcoin Knots. It would've been a bit surprising if these high-profile people suddenly started going on a tirade against coordinators, after all the events that happened here.

But lets be realistic here - what percentage of network hashrate does Ocean pool have? I would be surprised if its even at 5%.

The problem is how much influence this decision has on other mining pools and individuals. Let me explain... Jack Dorsey and Luke have always been very influential in the Bitcoin ecosystem. This move is definitely wrong if you consider the basic purpose of Bitcoin. It gives the impression that governments can apply their own rules if they have  the ability to infiltrate inside mining pools. I don't imply that this is what happened here, but I do think that governments will like it because they will see potential behind it. Potential to exploit hash power to achieve their goal. Which is to censor traffic on the Bitcoin network.

[btcinfo891]

Banknotes (not coins) have serial numbers. Why? Because this allows them to have (limited) traceability.

If you ever get a banknote from a bank robbery, abduction etc and the serial number of it is marked as "tainted", then you will have a huge problem if you try to deposit it in a bank.

Yes, it is possible to taint banknotes either by putting invisible ink on them or having their serial numbers treated specially when they are used at certain financial institutions.
It is easy for the government to check if a banknote is tainted but it is very difficult to get a list of people who own tainted banknotes. Tainted banknotes serve well when the police needs to catch someone taking bribes, but when they circulate in the society it is very difficult to find the path of a tainted banknote.

With government-controlled electronic money (bank money used in credit/debit cards and CBDCs)  they don't even need to specially taint anything. All transactions are visible to the government.

So we can say that the banknote anonymity is not perfect but it is quite good compared to that of the government-controlled electronic money.

It's the same thing with tainted BTC (from MtGox, Silk Road etc.) and CEX (crypto banks).

The tainting provided by the various "chainalysis" companies does not work perfectly because transactions have multiple inputs and outputs and that is why these companies return a probability score instead of a true/false flag. I am skeptic of their reliability, but putting aside that, the real problem is the KYC. It is similar to writing a report to the government each time when you buy something at the corner store or lend $100 to your friend.

Also, they may introduce additional tracing technology, in case the masses want to retain cash at all costs:

https://www.fleur-de-coin.com/eurocoins/banknote-rfid
https://www.eetimes.com/euro-bank-notes-to-embed-rfid-chips-by-2005/

The European Commission works relentlessly on turning the EU into a totalitarian state, so I wouldn't  be surprised if sooner or later they introduce banknotes with RFID chips. But this kind of "cash" will have very little in common with the real cash that we use now.

[DooMAD]

So it's not really a censorship, it's just bad coding by Bitcoin Knots.

Arguably, it's both.  It was done with the intent of censoring ordinals and it was poorly implemented.  Bad coding and bad principles in equal measure.

But in a way, this misstep is a natural part of progress and how we move forward.  This not only serves as a prime example of how not to do things, but also clearly illustrates how fine the line is and how easy it is to cross if we're not vigilant.  Hopefully people will realise the error of this approach and not make such mistakes again.  This is what happens when you try to meddle in the natural order of things. 

Those who try to act as arbiter and gatekeeper will, sooner or later, inevitably deny access to the wrong party by mistake.

I urge everyone to learn from this.

[Abiky]

IMHO, it was a mistake on Satoshi's part designing Bitcoin is such a way to also include arbitrary data (i.e. the bank bailout message), not just financial transactions.

If I had it my way, BTC's blockchain would store ONLY financial transactions (this is possible with Mimblewimble which makes the blockchain very lightweight, i.e. BEAM, GRIN) and there would be a separate, optional blockchain (sidechain if you will) to store text messages, photos, audio files, videos (even DVD movies) etc.

Unfortunately it's too late to do that, nobody will accept a hard fork.

Haven't you heard about UAHFs (User Activated Hard Forks)? Users & node operators can unanimously agree to censor Ordinals inscriptions even if miners don't like it. After all, they don't posess full control over the BTC blockchain. Once there's a supermajority of network nodes running software with the filter, Ordinals will be gone for good. I know this goes against Bitcoin's censorship-resistant principles, but it's for the best if we want low fees again.

OFAC-sanctioned transactions, on the other hand, are another story. Miners shouldn't censor these transactions just because the US government wants to. Isn't the whole idea to make Bitcoin an independent monetary system from banks and governments alike (no middlemen)? We've entered uncharted territory, so either BTC remains a censorship-resistant cryptocurrency or all the other way around. The future is widely unpredictable, so we can only hope for the best.