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Since people are once again talking about self-custody as one of crypto’s unique strengths, I would like to remind everyone about an equally important fundamental value proposition of crypto that, in the early days, was touted as the killer feature. I’m talking about censorship resistance.
The following opinion editorial was written by Bitcoin.com CEO Dennis Jarvis.
The Three Pillars of Censorship Resistance
In the financial context, censorship resistance is the ability to carry out financial actions despite the wishes of any third party.
In crypto, the three pillars of censorship resistance are:
The freedom to transact. This means third parties cannot prevent you from sending or receiving assets.
The freedom from confiscation. Third parties cannot take away or freeze your assets.
The immutability of transactions. It is impossible for third parties to change or revert transactions after the fact.
Troubling actions increasingly taken by centralized entities in the public and private sector demonstrate the importance of censorship resistance. Let’s look at some examples:
Public Sector Censorship
Governments have shown an increased willingness to exert control of financial institutions while also ratcheting up their crypto regulatory efforts. Earlier in the year, Trudeau’s Canadian government took the unprecedented step of invoking emergency powers to freeze or suspend the bank accounts of Canadian citizens without court orders. Their crime? Donating funds to fellow citizens participating in the Freedom Convoy protests.
The U.S. Treasury Department’s watchdog the Office of Foreign Asset Control (OFAC) made headlines this summer by banning and sanctioning addresses that used Tornado Cash, a decentralized application that improved privacy for users by “mixing” ETH.
The U.S. Securities and Exchange Commission (SEC) increased crypto regulatory actions, best exemplified by this quote from SEC Chairman Gary Gensler who said, “…the SEC will serve as the cop on the beat. As with seat belts in cars, we need to ensure that investor protections come standard in the crypto market.” This isn’t merely empty rhetoric, the SEC nearly doubled the size of the Division of Enforcement’s Crypto Assets and Cyber Unit in 2022.
Private Sector Censorship
Post-merge, a majority of Ethereum’s blocks are compliant with OFAC. This is a potential problem because OFAC-compliant relays will not include any transactions that interact with the Tornado Cash smart contract or other sanctioned wallet addresses as designated by OFAC. Not all blocks built by OFAC compliant relays are censoring, however, all blocks built by OFAC compliant relays will censor when non-compliant transactions are broadcast to the network. As Martin Köppelmann, the co-founder of Gnosis, noted about the state of OFAC compliant relays, “[t]his means if the censoring validators would now stop attesting to non-censoring blocks they would eventually form the canonical, 100% censoring chain.”
Centralized stablecoin companies Tether (USDT) and Circle (USDC) have a history of cooperating with law enforcement requests to freeze assets. Circle complied with OFAC’s Tornado Cash sanctions by banning “tainted” USDC. So far Tether has decided to not comply, but that can change (and probably will, given sufficient pressure) in the future.
Outside of crypto, Paypal made international news when it released an updated policy that let Paypal fine users $2,500 for spreading ‘misinformation.’ Paypal quickly retracted the policy in public, though much of the language remains. This includes $2,500 fines that have existed since September 2021 for the very vague “promotion of hate, violence, racial or other forms of intolerance that is discriminatory…”
While Paypal was almost universally condemned, its actions are consistent with a growing number of web2 companies, such as Twitter, Youtube, and Facebook, who are using their platforms to punish behavior they deem “bad” through levers like demonetization, suspensions, and bans.
Censorship Resistance Is the Antidote
Censorship resistance is one of the main value propositions of decentralized finance in general and Bitcoin specifically because it fundamentally separates the technology from any traditional financial tools. In fact, censorship resistance is so strong in Bitcoin as to render it an economic freedom enhancing technology. This dramatization powerfully demonstrates why:
The silver lining to the concerning increase in authoritarian actions from both the public and private sector is that they are helping refocus attention on censorship resistance.
Bitcoin, once the embodiment of crypto, had become ridiculed as worse than boring — antiquated. It’s nice to see this begin to shift back as people inside and out of crypto reacquaint themselves with its deceptively simple power.
Within the crypto industry, more people are paying attention to the slow creep of web2-like features of speed and cheap transactions that are coming at the cost of censorship resistance. For example, prominent developers like the aforementioned Martin Köppelmann are sounding the alarms that the percentage of OFAC compliant blocks needs to be fixed. It’s also nice to see debates about censorship resistance begin to take up more oxygen within the broader crypto community. I particularly enjoyed Erik Voorhees’ piece on the empowering nature of defi.
This is not to say that all crypto projects need to be censorship resistant; indeed censorship resistance itself exists on a spectrum. Yet it is vital that some crypto projects remain robustly censorship resistant. At Bitcoin.com, we are proud to offer tools like the Bitcoin.com Wallet, that anyone can use to self-custody their Bitcoin and other cryptocurrencies. As an industry, let’s take the events of the last year to remember how important censorship resistance is. Let’s not sacrifice this industry-defining attribute for short sighted gains.
What are your thoughts on this story? Let us know in the comments section below.
Shark Tank star Kevin O’Leary, aka Mr. Wonderful, has shared how he and Sam Bankman-Fried (SBF) almost raised $8 billion from institutional investors to save crypto exchange FTX before it collapsed. However, when reports emerged of FTX being investigated by several authorities, including the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), all interested investors vanished.
Kevin O’Leary Tried to Raise Funds to Save FTX
Kevin O’Leary shared how he tried to save cryptocurrency exchange FTX before it collapsed in an interview with the Insider, published Sunday. O’Leary is a paid spokesperson for FTX and has investments in the company.
Prior to FTX’s bankruptcy filing on Nov. 11, Mr. Wonderful was talking to a number of prospective investors interested in owning a stake in the crypto exchange. Sovereign wealth funds were interested in investing $8 billion to rescue FTX, he told the publication.
Noting that Bankman-Fried called him to discuss the investments, O’Leary shared:
We had a brief conversation. He was very rational. We discussed a few things about, you know, the timing on that $6 billion to $8 billion. But it was enough information for me to go back to the interested sources and confirm the number was eight.
Mr. Wonderful noted that Bankman-Fried said during their call that regulators will “come down hard” on the situation.
However, as reports emerged that the Securities and Exchange Commission (SEC), the Department of Justice (DOJ), and other global regulators were closing in on FTX, rescue offers immediately dried up. O’Leary continued:
All of those interested parties were gone … I texted that back to Sam … and I told him that was not going to be an option.
Nonetheless, O’Leary believes that if a sovereign wealth fund or other buyers had put in roughly $4 billion, then investors would have felt confident in keeping their assets in FTX. “So really what was on the table and being debated all around the world was you could buy a $32 billion asset for $4 billion,” he said.
‘There’ll Be a Mountain of Litigation’
Mr. Wonderful has started moving his assets elsewhere, he revealed, noting that Canada is the only country that offers fully-regulated broker-dealer exchange accounts. “We have confidence that the regulatory environment in Canada scrutinizes accounts that can’t be commingled,” the Shark Tank star opined, adding that he believes the market has not seen the bottom of the FTX fallout yet.
Commenting on the FTX meltdown rattling trust across the crypto sector, O’Leary opined:
There’s a lot of allegations flying around … It’s a difficult situation, there’s no question about it. There’ll be a mountain of litigation.
Despite regulators investigating Bankman-Fried and the crypto industry screaming fraud, O’Leary maintains he’s never met a more brilliant mind when it comes to crypto and blockchain. He described:
He’s a savant … He’s probably one of the most accomplished traders of crypto in the world, and so I was very impressed.
Last week, the Shark Tank star said he would back Bankman-Fried again if he has another venture. This has outraged the crypto industry since most people believe that the former FTX CEO engaged in multiple fraudulent activities.
Like other FTX investors, including the Singapore government’s Temasek Holdings and Ontario Teachers’ Pension Fund, O’Leary is writing down all of his FTX investments. He stated: “I’m writing that all down to zero … It’s not clear what can be recovered.”
What do you think about the comments by Kevin O’Leary? Let us know in the comments section below.