Taking a Principled Stand — on Both Sides of Privacy

The US Department of Justice moving $2 billion of bitcoin to an exchange is a reminder that 1) transacting on a blockchain is transparent and 2) we used to think that transacting on a blockchain was not transparent.

Today, sending bitcoin on-chain is like sending money on Venmo — everyone can see what you're up to — but we've only figured that out recently.

When the DOJ acquired its bitcoin hoard in the 2013 arrest of Ross Ulbricht, we still thought anonymity was what made crypto special — and at that time, it was.

Before the blockchain analytics firm Chainalysis was founded in 2014, the only way to follow a trail of bitcoin transactions was to do it manually, on a spreadsheet, which hardly anyone tried because it's nigh on impossible.

The FBI did not discover that Ross Ulbricht was operating the Silk Road marketplace as the Dread Pirate Roberts because he was exclusively accepting bitcoin as payment. Instead, Ulbricht was discovered because he used his real-name email — rossulbricht@gmail.com — to register a dark-web server in Iceland.

Ulbricht quickly recognized his mistake and switched it to frosty@frosty.com, but the damage was done. Silk Road was taken down by an FBI agent who found Ulbricht's email with a Google search.

Ulbricht's arrest divided opinion within the crypto community, which was split between those who thought the Silk Road marketplace was a noble embodiment of bitcoin's libertarian ethos and those who thought that the association with Silk Road unfairly branded bitcoin as a currency for nothing other than criminal activity.

The debate never fully played out, at least in part because we learned soon thereafter that bitcoin wasn't so anonymous, after all.

Instead of having to think too hard about the pros and cons of total financial anonymity, that allowed us to short-circuit the debate by adopting transparency as bitcoin's big selling point.

To every subsequent accusation of criminal activity, the response was simply that bitcoin is ill-suited for crime because it's transparent, immutable and only pseudo-anonymous.

It must not be that terrible, however, because 10 years later, crypto still appears to still be facilitating its fair share of criminal activity.

Recent reporting suggests that crypto is funding Vladimir Putin's war machine, flooding the US with fentanyl, defenestrating US sanctions, exploiting our loneliness and possibly even financing slavery.

Would a hard-core libertarian like Ross Ulbricht approve?

I'm not sure, because even the Dread Pirate Roberts had his limits — kidneys, weapons, cyanide and drugs were welcome on the Silk Road marketplace, but assassinations, child pornography and stolen identities were not.

Everyone has their line in the sand — pirates included — but we have successfully avoided debating just where that line should be drawn.

It feels like we may not be able to avoid it for much longer.

Stablecoins, for example, have so far been tolerated by US law enforcement despite their inherent lack of KYC, but this seems to be changing.

Tether's central role in Russia's ability to evade US sanctions has prompted the US Treasury to seek new powers over stablecoins, and it's hard to argue with their point of view — why should Tether, effectively an unregistered bank, get to do what registered banks cannot?

The typical crypto rejoinder — but it's transparent! — is unlikely to suffice when national security is deemed to be at stake.

To maintain the current happy state of affairs, in which stablecoins are free to pour into crypto and push up token prices, we'll probably have to offer a proactive rationale as to why peer-to-peer transactions in digital dollars do more harm than good.

I think there's a good case to be made: adding demand for dollars, extending its reserve status, more efficient payments, dollars for people in hyperinflating countries — and hopefully industry champions like Circle and Coinbase will successfully make it.

But, even so, that may only prove to be a warmup for when zk proofs and new privacy protocols (like Nocturne and Railway) bring full anonymity to blockchain transactions, as seems inevitable.

If so, we'll soon have to decide just how libertarian we really are.

― Byron Gilliam

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We're Watching

In today's interview, Philip, the founder of Elixir, discusses how his project aims to democratize access to liquidity provisioning on order book exchanges. He explains Elixir's unique architecture as a modular DPOS blockchain that uses a market making algorithm to allow anyone to supply liquidity to order books in a trustless fashion.

Watch or listen to Bell Curve on YouTube, Spotify or Apple.

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Daily Insights

Joseph Wang @FedGuy12

Powell leaning in on labor supply increase via migration. This seems to make NFP prints very asymmetric - strong prints are going to be dismissed as increased supply, but a hint of weakness leads to early/more cuts. IMO everything going to surge the moment NFP weakens

Apr 3, 2024

325 Likes 46 Retweets 34 Replies

Haseeb ＞|＜ @hosseeb

People used to laugh at Ray Kurzweil's futurist predictions. He predicted in 1999 we'd be able to do computation equivalent to a human brain in roughly 2023. 2023 is the year that GPT-4 launched.

Don't underestimate linear extrapolation. Simple models often work the best.