There is a simple reason why Tether (USDT) has avoided being audited. At least 31% of the reported funds have been embezzled from the Russian state with at least 13% of the total Tether value earned through fraud conducted in the UK.
Institutions have rules that preclude them from investing in organisations that have benefited from the proceeds of crime.
HODL is all about having a few people invest in Core coin (BTC) so that some others can get money out. If it was about use, then it would be a spend-and-replace argument, that would place more upward pressure on price, accepting that the 1-MB cap on Core coin precludes such an argument as an option. It would also stop crime-friendly log-destruction systems (such as Lightning).
For some reason, those in Core coin (BTC) have a mentality that they can stop the requirement to support and submit Suspicious Activity Reports (SARs). SARs are a critical intelligence resource for tackling money laundering, terrorism, serious and organised crime, corruption, and fraud.
Even more importantly, exchanges and those involved in money-handling services need to be able to investigate their clients. Failure to do so is a crime, and will lead to the exchange in question being shut down. Several bucket-shop exchanges (such as Binance) seek to flaunt the legislation. They ignore how they are far more centralised than an organisation like Liberty Reserve. Liberty Reserve with over 30,000 distributed points, no central database, funds distributed across over 1,000 banks, and no direct links to the USA was taken down in a global anti-money laundering (AML) action.
More critically, Liberty Reserve was taken down without all of the advantages that blockchain offers to law enforcement. Liberty Reserve was able to delete records and still be charged. Liberty Reserve was far more decentralised than any blockchain will ever be. Bitcoin survives not because it is decentralised but because it acts within a legal framework that allows it to be traced.
To be valuable as money, Bitcoin needs to be widely used. Not as a money-transmission system that is required to maintain its own logs such as Lightning, but on-chain. A critical part of understanding Bitcoin is to understand that it acts within the legal framework — or it can easily be shut down. The so-called argument made by bucket-shop-exchange promotion groups, Tether-pumping criminals, and the assorted Ponzi scams within the industry is that Bitcoin is decentralised and thus it cannot be stopped. Nothing is further from the truth. Bitcoin is decentralised, and as a result evidentiary logs are maintained across every system that acts as a commercial unit within Bitcoin. The evidentiary logs within Bitcoin are the transaction records. The consequence of decentralisation is an immutable audit trail.
Systems such as Liberty Reserve did not maintain logs. A few of the key people ended up in prison, but that was it. If Liberty Reserve had been blockchain enabled, around 100,000 criminals who used the system of the 2 million or so in the total client pool would now be facing prison or be on the run.
There are some who seek to create a system that does not rely on the controls inherent in Bitcoin. Such people seek to create sidechains or Lightning Network systems that are money services businesses (MSBs). By law, all of such systems, every node within the system, every user will need to keep full compliance details or otherwise be breaking the law. It’s the dirty little secret that they are not telling you about Lightning. It was always designed to be a system that loses records. You see, Bitcoin, blockchain in any form does not lose records. The transaction either occurs or it doesn’t, and when it does occur, the record is permanent and cannot be removed.
So, when you are told about institutional money coming into Bitcoin and then being lied to about Core coin (BTC), remember that institutional money cannot invest in a system that is not legal. Bitcoin is legal, but the implementation that some seek to create as a dark-mirror copy of Bitcoin [also known as Core coin (BTC)] will require nodes to register with the government.
The very thing that they’re trying to remove, the immutable audit trail that creates Bitcoin, is the thing that makes it legal and where other cryptocurrencies and digital coins have failed.
Blockchain does not preclude tracing; it simplifies it.
Coin media — for want of a better word — is very little if such media is really a means to manipulate the “market” as we see it now. More importantly, as we’re not seeing a large amount of use but pure speculation and gambling instead, I’d argue that it’s not even a market. Today, we have seen arguments that Microsoft was going to use Bitcoin in creating a sidechain for identity. Without even going into a number of patents that cover some relevant aspects here and preclude unlicensed use outside of BSV, I will firstly note that Microsoft is blockchain agnostic.
Importantly, what we are seeing is the scaling lie. Such a lie is created to sell the idea that Bitcoin needs to act on Lightning nodes and sidechains. The reality is that the argument is purely made in order to destroy evidence. The only reason for Lightning to exist is to lose records. Fortunately, legislation covers it. Legislators have already thought about the same issues decades ago. In the anti-money laundering (AML) provisions, the requirements cover funding. Bitcoin was always a means of funding, and as such has always been covered.
Stopping crime is not censorship.
The standard argument you get from the anarchist crowd is that Bitcoin is about censorship-resistant money. Bitcoin is cash first and foremost, and acts as a monetary system. It’s very simple: miners accept transactions, which can be moved, but a complete audit trail is always maintained. If users spend small amounts of money, it goes under the amount of any AML requirement. For instance, if you spend £200 on legal but questionable goods or services, there will be no required reporting. If you’re spending small amounts of money, Bitcoin is just like cash. Anti-money laundering rules kick in for large transfers.
Where there are custodial services, any custodial services, or even mixing services or exchanges, the law already encapsulates any blockchain. It is of value transfer or funding — which is all that is required under the AML rules. As such, every single custodial service will need to follow the law.
If you are taking money in Europe or money from an individual who resides in or is a citizen of Europe, you’re covered by European law. If you are taking a US dollar anywhere in the world in any form or converting to such a system even with something that has a funding value attached and pegged to the dollar, or if you have a single US citizen, US resident, or US user domain, you are covered by US law. You can be covered by US law and European law simultaneously.
One of the primary reasons why I created Bitcoin was to make a system that could act without needing regulatory control over the base money supply and still retain a level of resistance to fraud. It was designed to minimise criminal uses and to make many of the abuses of the system, as occurs with SWIFT, easily traceable. Such is why a number of exchanges (bucket shops, really) like Binance and Bitfinex exist — to bypass the controls built into Bitcoin. So, let’s think about how we would go about such a scenario.
A suspicious activity report is created and sent through Interpol and other agencies. It notices a particular address, which is reported to all exchanges and custodial banks. It can be a very quick process, which happens within the banking industry already. The exchange or custodial wallet now has the choice of either blocking any transactions from the same address or acting without the protections of law. Such transactions would include any transacted coins that are joint to the earlier transaction.
The process is not difficult. Existing funding laws allow it to occur today, and the MLD5, the updated anti-money laundering directive in the EU, simplifies the process for any regulator.
Let’s have a look at how the process works. Any custodial wallet or exchange that receives anything without a source of funds that can be verified can be shut down. This is already criminalised. Next, if a Suspicious Activity Report has called for funds to be frozen, then all of the parties have to act on such a call. The process occurs right to the point where someone validates that they have a right to the money.
If Charlie sells tainted coins to Alice in exchange for goods and services as valid consideration without knowledge, then Alice has the right to spend such money. So in this case, Charlie needs to exchange using a non-custodial system with Alice who is also on a non-custodial system. If the amounts exchanged are large, Alice will record Charlie’s identity. If Charlie is purchasing a car or real estate, then Charlie will need to account for his identity, and Alice will maintain it.
If Charlie has tainted coins because he has done something illegal or even obtained illegal coins that he knew were tainted, then Charlie does not have a right to them. If Charlie moves them or stores them in any way on any form of custodial system including an exchange, Charlie’s coins can be seized.
Even if Charlie could go through a mixer, it won’t help. Mixers are custodial, and require anti-money laundering provisions. The only way Charlie could get away with exchanging his coins is to do so using non-custodial wallets and to exchange money to non-custodial wallets. If Charlie wants to transact with Alice and he has at any time mixed any of the suspiciously reported coins, then they can be traced. The depth of coin mixing is irrelevant. Existing law means that Alice can be asked where she obtained her funds. Unless Charlie is spending very small amounts and far too small amounts to be a concern for money laundering, then the system can be stopped.
Alice can accept payments without coming under the money-handling provisions as a merchant. She cannot do so if she is an exchange or a seller of cryptocurrency. Consequently, it starts to become very simple to filter out and block illicit uses of cryptocurrency. Small personal payments, say in the order of £200, don’t matter. If Charlie had stolen £1 million worth of cryptocurrency, he could go round in a cycle of stores where he doesn’t spend more than £200 in any one store in any one month with a very low probability of detection — that is, as long as he doesn’t return to a store. If he was to return to a store, there is a possibility he could be caught. So, Charlie would be able to go from store to store looking for non-custodial systems that don’t run on something like Coinbase spending small amounts at each store over a long time period. But if a single one of the stores was integrated with the Suspicious Activity Report system, including if the store had a point of sale system linked to a custodial wallet, Charlie would be reported.
We have source-of-wealth laws.
Charlie would then need to prove in a court of law how he obtained his money from another person through a valid sale. Charlie would not have the opportunity to make an argument saying that he randomly got money from another person. If he tried it, his phone or other sources of whatever wallet he is using could be legally confiscated.
Bitcoin and any blockchain-based system act within the law.
If both Charlie and Alice act to make an exchange using non-custodial systems where goods and services are exchanged for the same bitcoin that is included in a Suspicious Activity Report and Alice does not subscribe to any reporting system, but now Alice transfers her money into a bank, custodial system, or exchange, then Alice will need to explain the source of funds. As soon as she does so, her funds will be frozen legally by a reputable exchange or another custodial system. Failure to do so would criminalise the exchange.
So, once the process occurs and Alice goes to Bob who runs a custodial service, information will be supplied to law enforcement. If it’s a small low-value target, Alice is likely to be ignored and just get access to her money. If it’s a high-value target and Alice has video footage or any other information, law enforcement will take a look. Legal fungibility means that Alice will have a right to her money as long as she can prove that she received it without knowledge of the illegal nature and for a valid exchange of goods and services. Where people go wrong is that they think a system can act outside the law. It doesn’t.
More importantly, the false concept of censorship resistance is asinine. Bitcoin does not stop people who break the law from getting caught. Importantly, Bitcoin creates an evidentiary trail that allows law enforcement to step through and find the source of funds in any situation like the one described. The only way that the system works outside of law is for a purely criminal system to exist alongside Bitcoin. Then, the entire economy would need to be a criminal system, which is something that beggars belief.
Order exchanges to block addresses
Regulatory control is simple to introduce with Bitcoin. Personally, I’m tired of the arguments about censorship. Never once have I said that Bitcoin was about censorship resistance. It isn’t. Bitcoin is secure enough to act within legal frameworks. When you start adding systems on top of it such as the likes of Tether and Wormhole that are designed purely as record-losing criminal coins, then it is not secure enough. All of the changes people seek to do on Bitcoin are about creating a system that can act outside of the legal frameworks we live in. But you can’t. Bitcoin takes you in the opposite direction, and makes it more difficult for criminal coins to act outside the law — not less.
I will say it again: there has never been a single quote from me when acting as Satoshi that concerns censorship resistance as the purpose for the creation of Bitcoin.
In fact, Bitcoin is easy to trace where crime is involved. Intentionally so. More, I have methods to allow regulators and government to stop all crime going forward that comes from a blockchain. Any blockchain.
Double spending and orphans
The reality is, double spending is not a concern in Bitcoin. In the early days, when I ran around 70 machines, it was easy to attack the network without consequences. In the past decade, the scene has changed. I published a paper analysing the criminal nature of botnets in 2011, and as part of the investigation, we noted that Bitcoin was being mined by large criminal botnets.
CPU-based systems achieve K hashes per second. GPU-based systems achieve G hashes per second. ASIC-based systems achieve T hashes.
The reality here is very simple: One ASIC unit can cover the equivalent mining power of between 1000 and 1 million computer systems. If we’re talking about high-end computer systems with expensive GPUs, that’s closer to the thousand X mark, whereas in the majority of botnets, we are talking about CPU systems and an inefficient means of mining. The result is that even with the largest botnets, ASIC-based mining systems mean that the criminals come off second best. With any ASIC system, the exponential power gains in mining remove all effective use of botnets. The introduction of ASIC mining changed the game completely. ASICs didn’t just increment mining slightly, they made it so that a small home user would effectively beat the largest criminal botnet.
The argument on double spending is one of allowing fraud and getting away with it. Very simply put, if you’re not going to follow law, you get caught and you go to prison. For instance, when you go to a restaurant, you don’t pay until the end. If you don’t pay, you face prison.
So the argument on double spending isn’t even valid for restaurants. If you paid your meal with a fake cheque or using a stolen credit card, you get in trouble. Double spending isn’t an issue for any merchant. You don’t look at (the concept of) “safe” as a concept in isolation but rather as a relative term when compared to other events. In our case, “safe” is compared to other systems. Right now, credit cards are particularly unsafe. Even taking money as physical cash has risks. The most common fraud is the one concerning one-pound coins. There are some 30–40 million counterfeit one-pound coins in circulation, so about 2.8% of the total are fake. The counterfeit numbers of larger notes, such as a £20 note, are far smaller — with Victoria Cleland, Head of the Notes Division, noting that just one note in every 5,000 was a fake.
Such is our best case.
We can set such a case as the upper boundary to beat. That is, for a £100 meal, the restaurateur will need to account for two pence worth of fraud from £20 notes alone. If we look at the chance of doing a Bitcoin transaction that can be double-spent, and we can reduce the cost of stopping double spends to one that is under such an amount, we have lowered the risk. And the reality is that a double spend costs far more to even attempt and needs to be conducted within seconds.