Crypto Means Absolutely Nothing Without Censorship Resistance

The battle for how to regulate cryptocurrency might handicap the entire value proposition if we simply apply the same old rules to a new way of moving money around.

AccessTimeIconOct 23, 2022 at 2:50 p.m. UTCUpdated Oct 24, 2022 at 2:32 p.m. UTCLayer 2
AccessTimeIconOct 23, 2022 at 2:50 p.m. UTCUpdated Oct 24, 2022 at 2:32 p.m. UTCLayer 2

George Kaloudis is a research analyst for CoinDesk Research.

Censorship resistance is fundamental to any functioning cryptocurrency or blockchain project. It’s been a pillar of crypto from the start, one of the biggest reasons the whole movement got started. What it means is this: As long as a participant in the Bitcoin or whatever network follows the predetermined technical criteria to construct a valid transaction, then nobody – not the cops, not your nosy neighbor – should be able to prevent that.

So there’s zero surprise that Sam Bankman-Fried (the crypto billionaire known as SBF) kicked up controversy when the FTX founder and CEO published an article last week on crypto regulation. He talked about implementing blocklists – aka a roster of wallet addresses banned from interacting with a blockchain because they’re suspected of being used for nefarious purposes – and, relatedly, respecting the U.S. Office of Foreign Assets Control’s (OFAC) sanctions lists by maintaining “an on-chain list of the sanctioned addresses … maintained by either OFAC or by a responsible actor.”

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Here’s the problem. Removing censorship resistance defeats the entire purpose and value proposition of cryptocurrency. Cryptocurrency is supposed to be about banking the unbanked, about granting open access to financial tools, about empowering otherwise unempowered people. There’s nothing valuable in remaking the same financial system – which caused these problems in the first place – with a new, fancy crypto wrapper that openly welcomes censorship just because it is new and fancy.

Yet, even as SBF talks about how things should go down the line, censorship resistance is already being undermined. Just look at the news on Ethereum, where, following the Merge, more than half of blocks in one 24-hour period recently were processed in accord with OFAC compliance recommendations.

While there’s no shortage of cynics who claim that cryptocurrency is a giant Ponzi scheme, we’ve seen enough anecdotal and empirical evidence to support the idea that Bitcoin is actually valuable and useful. But I believe one of the main reasons Bitcoin is only valuable and useful is because it’s censorship resistant.

To SBF’s credit he does include an important hedge to his proposal, writing that “all of commerce breaks down if you require a[n] allowlist to transact.” This is completely true. Imagine having to prove who you were to buy anything at all.

He also added a reasonable-sounding point that I think a lot of people would agree with. He writes that “maintaining the presumptive freedom of peer to peer transfers and decentralized blockchains (unless there is specific evidence of a scam, illicit finance, etc.) is absolutely necessary.” (Emphasis added)

A lot of people would agree with this statement because on the surface all this means is that good people should be allowed to transact freely and bad people should not. The problem is that aside from the obvious examples of badness (like, say, cold-blooded murder or something), the definitions of good and bad shift depend on who is making the rules.

All that is to say the thing that remains when you remove censorship resistance from crypto is hardly something to get excited about. For lack of a better way to write it, I’ll defer to a tweet by Bennett Tomlin from Protos and the “Crypto Critics’ Corner” podcast, who summed up this viewpoint succinctly writing: If crypto lacks censorship-resistance then it is just gambling and schemes.”

I think this is exactly correct and an accurate characterization of crypto without censorship resistance. While there still might be money to be made in the casino-like, rug pull-filled fringes of the cryptocurrency world, I find it unlikely that investors would be excited to line up to champion that value proposition.

Crypto means absolutely nothing without censorship resistance.

Oh … and don’t forget about privacy

But, of course, we should take this at least one step further. Censorship resistance without privacy also doesn’t really matter. And that has been an issue with transparent networks like Bitcoin (which is very critically not anonymous; Bitcoin maintains a public ledger of transactions complete with identifying addresses and balances. It is quite literally the opposite of anonymous, especially if you are new to using the network).

This is something we saw in February 2022 when Canadian truckers protested a vaccine mandate. While the protestors were able to receive funds via Bitcoin, Ethereum and other networks, the transparency of these blockchains made it practically impossible for the protestors to withdraw that money for fear of the Canadian government freezing or suspending their bank accounts.

So, sure, it’s true that someone can send me bitcoin (BTC) even though the government doesn’t want me to receive it. That’s because the Bitcoin network is censorship resistant. But if the government can trace the transaction and see that the bitcoin came from you to me, then it could do something about the fact that I did receive funds from you outside of the Bitcoin network.

We need censorship resistance and we need privacy.

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George Kaloudis is a research analyst for CoinDesk Research.