“Your Expectations of Privacy Are Too High” (But They Shouldn’t Be) – Bitcoin Magazine

The Halving (sometimes referred to as “the Halvening”) is the predetermined moment when Bitcoin’s block subsidy gets cut in half. The halving of Bitcoin’s block subsidy occurs every 210,000 blocks (approximately every four years) and is a key feature of Bitcoin.

Bitcoin Magazine presents non-stop coverage of Bitcoin’s third Halving with hours of commentary and analysis from Bitcoin 2020 speakers and some of our closest friends.

Ring in the new Bitcoin halving cycle the right way: with us!

Bitcoin mixing, the practice of scrambling one’s Bitcoin with others in order to obscure the connection between an individual’s identity and coin address information, has seen a number of innovations over the last decade. Some of the early mixing efforts took the simple form of two coin holders privately agreeing to swap coins in like amounts and led to the formation of transaction aggregation services, crypto tumblers, Lightning, and the practice of moving coin balances through interim coins like Dash or Monero, or others. There are also logless VPNs, Tor, and using HD (“Deterministic”) wallets. Each of these practices comes with a set of costs and benefits, and none are perfect; thus, many cryptocurrency users and devotees employ several or all of these means to maintain their anonymity. 

And so it is that the recent arrest and indictment of DropBit CEO Larry Harmon several weeks back sent a chill down the spines of crypto users and privacy entrepreneurs alike. 

Between 2014 and 2017, Harmon operated a custodial tumbler service, Helix, a sidecar to a darknet search engine called Grams and eventually to the darknet marketplace AlphaBay (among others). This service allowed users to search, buy and sell on the unindexed deep web with new addresses generated for each transaction. 

The indictment against Harmon claims, among other things, that over 350,000 BTC was received into custody, tumbled and then transmitted by Helix without a license from the Superintendent of the Office of Banking and Financial Institutions of the District of Columbia (some of his customers having been located there), without being registered with FinCEN (the Financial Crimes Enforcement Network), and in violation of a number of federal laws. 

Tired Tropes

It’s worth remembering that right about the time that Harmon was arrested — in fact, the day before — U.S. Treasury Secretary Steve Mnuchin spoke before the Senate Finance Committee. Applying such classic and time-worn euphemisms to cryptocurrencies as being a “crucial area” (translated: “a crackdown is about to begin”) and calling for increased “transparency” (translated: “your expectations of privacy are way too high”), his speech was capped off by words that many of us have long expected: that Bitcoin, and cryptocurrencies more generally, pose a national security threat to the United States. 

The problem, of course, is that the putative threats mostly represent entrenched interests and institutions situated high in the edifice of state power. While one can understand that large firms and legacy institutions (a particular one of which is characterized by an intractable quasi-government ownership structure) would rent-seek to prevent their displacement by competing ideas, technologies and new institutions, that understanding takes a form similar to that which accompanies seeing nations go to war or watching a bully victimize a smaller, weaker person: It occurs, it may even be inevitable, but no one should stand aside silently.

Issues of KYC and AML

The implications of this newly reinvigorated push has implications for all Bitcoin and crypto owners and users — the overwhelming majority of which have never transacted upon (let alone visited) the dark web. At present, individuals are not responsible for knowing the precise history of their coins. But if laws relating to the responsibility of a purchaser to ascertain whether their property has been stolen or not extends to crypto, or (more likely) if exchanges decide to include blockchain analysis in the measures they undertake to “reasonab[ly]” ensure that they are vigilant against money laundering, the fungibility of Bitcoin will be damaged. There is no established standard against accepting coins with mixing in their histories; yet if it becomes the modus operandi, many coins will be rendered unusable. 

If one purchases, sells or even receives a coin which, unbeknownst to them, contains a “laundered” history or objectionable material (your imagination suffices), is legal culpability triggered? 

How much personal responsibility does one bear for knowing the recent (or, indeed, all) transactions a coin or other crypto asset in their possession has been party to? Can coins which have been mixed in the past or been part of illegal transactions be seized in the same way that funds and other sorts of property can in civil forfeiture proceedings? 

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