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Already it's possible for MtGox etc. to detect spends of coins that have certain well-known thefts in their history. If regulators forced audits on exchanges and key popular merchants, as well as keeping track of coins they deemed to have been involved in illegal activities, they could make these exchanges and merchants pay a small tax on these 'tainted' transactions and pass this cost on to the consumer. As the regulators 'tainted' coin list would be public, it would become in more and more peoples interest to use wallet software which subscribes to the 'taint' list in order to reject coins they know will incur a penalty upon spending. The more the regulator raises the tax at the exchanges and audited merchants, the more people must join.

Audited exchanges and merchants would have to submit batches of all bitcoin addresses involved in their transactions to the regulator. Agents could perform random transactions with exchanges and merchants to make sure 100% of transaction IDs are reported.

Is this scenario realistic, and wouldn't this make Bitcoin ultimately a very controlled environment indeed?

('tainted' coins would still have value on black markets, creating a split system where bitcoins are no longer completely fungible)

  • 1
    I suppose the corollary question is should the bitcoin network even try to resist it? Software will simply adapt and tell you where you can and can't spend your coins depending on what blacklist they're on and what discount/penalty to apply based on how dirty the coins are. The regulators wouldn't be the only ones who could define blacklists - there could be public interest tags designed to boycott certain things. – Julian Noble Dec 2 '11 at 5:20
  • What makes you think the regulators do not already have a controlled environment with respect to the exchanges? There are more than enough people reporting that their withdrawal was well within the daily and monthly limit yet found that to get funds released they had to submit a passport and other identification. – Stephen Gornick Dec 2 '11 at 6:25
  • Yes, I think the exchanges are already somewhat restricted/controlled - but not to the point where they're automatically reporting all bitcoin transaction ids. (although - maybe those would be available upon subpoena) – Julian Noble Dec 2 '11 at 6:33
  • Note that 'to reject coins' isn't really directly possible - but wallet software subscribing to the blacklists would presumably know to isolate those coins and either allow sending those specific coins back to abort the deal, or to quarantine them. The user might choose to accept them but ask for further payment as they place a lower value on tainted coins. – Julian Noble Dec 2 '11 at 7:38
2

In a scenario where bitcoin becomes widely adopted and an important part of the economy, governments instituting such black lists is plausible.

There are no technical means of resisting this. The only defense would be a social one, where people agree to only use exchanges, merchants, e-wallets and clients that don't discriminate against black-listed coins.

  • This is patently wrong, see @David's answer. – o0'. Aug 3 '12 at 15:19
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I don't think the scenario is realistic because it would only punish innocent people. By the time coins could be marked as tainted, they would already be in the hands of innocent people. Governments don't do similar things with other currencies. For example, if you deposit dollar bills in a bank that turn out to have been stolen, the government could charge the bank a "fee" to clean the bills which the bank could pass on to you. But governments don't do that because they recognize that by the time the bills could get on a "hot list", they're already in the hands of innocent people.

There are also specific features of Bitcoin that make this difficult. Transactions put all the input Bitcoins into a big pile which they dole out as outputs. There's no concept of particular output Bitcoins corresponding to particular inputs. Bitcoins don't have a serial number that can be traced through the block chain. So any such tracking rules would be basically arbitrary.

It's just not something realistic. It's more realistic with physical currencies which have serial numbers and are widely used to facilitate crimes and buy contraband. And governments don't do it with physical currencies -- largely because they know it would only punish the innocent.

  • "it would only punish innocent people" This isn't necessarily so. It would by necessity inconvenience them, but may only 'punish' them if they refuse to subscribe to the taint-information provided, or refuse to cooperate. A slightly delayed taint would still be useful to authorities as a way to incentivise(quite strongly so) cooperation in tracing the taint to the earliest known spend points. People who don't cooperate, risk having their coins heavily (or completely) taxed at the audited merchant/exchange points, people who do cooperate have their address branch untainted. – Julian Noble Dec 5 '11 at 1:37
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    I suppose that's true, but if it were feasible, I think it would be done with currency first, since that's a much larger problem and it would work equally well. – David Schwartz Dec 5 '11 at 1:39
  • I don't agree with your assertion that specific features of Bitcoin make this difficult. Please expand on this. I know that an initial tainted address could end up fanning out to taint a large number of other addresses - this is why the taxation/penalty at audited popular merchants/exchanges would create the conditions for it to go viral assuming on the whole that individuals act to preserve their wealth in preference to resisting a government mandate which claims to fight crime.(A pretty reasonable assumption I think). Subscribers don't get punished, anyone else may to varying degrees. – Julian Noble Dec 5 '11 at 1:47
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    You could do the same thing with currency. Have a hot list of serial numbers available on the Internet and remove serial numbers once bills are untainted. With Bitcoins, there are no coin serial numbers. There is no good way to say that a particular coin is tainted. (If 1 tainted coin and 800 good coins go into a transaction, do 801 tainted coins come out?) – David Schwartz Dec 5 '11 at 2:52
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    @JulianNoble: makes no sense, who would ever use such a coin? – o0'. Mar 7 '12 at 9:56
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As all transactions are transparent and can be seen by anyone, there is no way of resisting it other than by the unwillingness of the community. Only problem I can see with the discrimination against certain coins, are transactions that have multiple inputs and outputs, which would either "wash" the dirty coins, thus making the point moot, or "taint" new coins, thus being able to "infect" many more addresses.

Say I had 100 infected coins and sent each known address a Satoshi. At the moment the main client would accept that transaction and add the infected coin to your wallet. If you went with the tainting scenario, this would effectively taint the whole system. Of course, by then the clients would become more discriminatory about the coins they accept.

  • yes - the taints could become quite widespread initially, which is why I suspect the penalties would be applied gradually as small percentages. – Julian Noble Dec 2 '11 at 6:30
4

Note that tracking coins isn't trivial. If I make a transaction with a tainted 10 BTC input, a clean 10 BTC input, and a 20 BTC output, is the output tainted? Half-tainted? Whatever the answer, the system will be complex and unintuitive and people won't be eager to go along with it.

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    I would assume the whole lot would be tainted - hence the strong incentive to subscribe to the lists. There might be legal challenges to such blacklists though. Having received money 'in good faith' - why should the government be allowed to penalize you? (e.g if the taint was added to the database after you received them) – Julian Noble Dec 2 '11 at 7:10
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    So if the whole lot is tainted then I could send 1 tainted satoshi to every single public address known and taint every coin in the Bitcoin universe. Right? – DeathAndTaxes Dec 31 '11 at 16:01
  • @DeathAndTaxes: Weren't we over this already? In this scenario every address will have a tainted 1 satoshi output, which doesn't stop it from using its clean outputs. In my example I explicitly specified that a single transaction mixes clean with tainted coins. – Meni Rosenfeld Dec 31 '11 at 18:39
4

The problem with tainted lists is that it requires a trusted body to declare which coins are tainted.

1

I don't think your scenario is realistic. In particular, the idea of paying a penalty fee to "clean" tainted coins would indicate tacit acceptance of these illegal transactions. It seems more likely that they would forbid the acceptance of tainted coins altogether.

You may have considered this eventuality and rejected it as the taint would spread as mentioned in https://bitcoin.stackexchange.com/a/2128/684. You might imagine that the system would grind to a halt as nearly all coins become tainted.

However, there is a mechanism to untaint coins which were tainted accidentally or in retrospect found to be tainted when some of the coins long in the past are suddenly declared tainted. All that is required is for the same value as the tainted coins be sent back to the tainted "address". Slightly more technically, a new transaction with the tainted coins value is written with a scriptPubKey indentical to to scriptPubKey of the originally declared tainted transaction. "Taintexplorer" software, similar to Blockexplorer would be able to see the taint entering the transaction chain at a certain place and exiting later on. The remaining coins would be deemed to be untainted.

In this fashion, a clear distinction can be maintained between tainted and untainted coins. The most important feature of this is that the total value of coins declared tainted need only be as large as the aggregate value of the transactions declared tainted.

I believe that if the Bitcoin system gains widespread acceptance then policing of businesses and transactions in the fashion described is inevitable.

1

I would say something simple. If there are a tainted list, it is really very easy to avoid it. Anyone here know what was 1mdc (1mdc.com)? It was a service that "bailed in/out" e-golds. A similar service/coin will make possible bitcoin transactions "outside" of the Bitcoin blockchain. So, you see... Once you bail-in your bitcoins there will be no way to track it back as it will be spend using another system - no public transactions then. Let's say you have 100 bitcoins. You use the 1mdc alike system to bail-in your bitcoins. Once it happened no more transactions with this 100 coins will be made in the bitcoin blockchain until you bail-out it. But you do not need to bail-out the coins... Use the 1mdc alike coins where it is accepted. Voilà! tainted list is useless.

1

Could you make a custom client that doesnt process tainted coins? That would stop the spender if no one added his transaction to the block chain.

0

If you outlaw tainted coins, only outlaws will have tainted coins.

And in short order they would get mixed back in.

  • I don't know what you're trying to say here. Tainted coins can be marked clean again by the regulator after passing through a merchant/exchange where the penalty fee has been paid. When checking the taint list - a tainted address way back doesn't necessarily mean your current coinset is tainted because it might have passed through an address which was marked as 'fee-paid clean'. Other coins with the original taint may still be dirty. – Julian Noble Dec 2 '11 at 6:37

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