Crypto means absolutely nothing without censorship resistance
Censorship resistance is fundamental to any functioning cryptocurrency or blockchain project. It has been a pillar of crypto since its inception, one of the biggest reasons the whole movement started. What that means is this: As long as a participant in Bitcoin or any network follows the predetermined technical criteria for constructing a valid transaction, no one—not the police, not your nosy neighbor—should be able to prevent it.
So it’s no surprise Sam Bankman-Fried (The crypto billionaire known as SBF) started controversy when the FTX founder and CEO published an article last week about crypto regulation. He talked about implementing blocklists – also known as a list of wallet addresses that are banned from interacting with a blockchain because they are suspected of being used for nefarious purposes – and related to respecting US Office of Foreign Assets Controls (OFAC) sanctions lists by to maintain “a chain list of the sanctioned addresses … maintained either by 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 providing open access to financial tools, about empowering otherwise powerless people. There is nothing valuable in recreating the same economic 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 if the SBF talks about how things should go down the line, censorship resistance is already being undermined. Just look at the news on Ethereum, where, after the merger, more than half of the blocks in a 24-hour period were recently processed in accordance with OFAC recommendations.
While there is no shortage of cynics who claim that cryptocurrency is a giant Ponzi scheme, we have seen enough anecdotal and empirical evidence to support the idea that Bitcoin is indeed valuable and useful. But I think one of the main reasons Bitcoin is only valuable and useful is because it is resistant to censorship.
To SBF’s credit, he includes an important safeguard to his proposal, writing that “all trading breaks down if you need a[n] permission list to shop.” This is absolutely true. Imagine having to prove who you were to buy anything at all.
He also added a reasonable sounding point that I think many will agree with. He writes that “maintaining the presumptive freedom of peer-to-peer transfers and decentralized blockchains (unless there is specific evidence of fraud, illegal finance, etc.) is absolutely necessary.” (Emphasis added)
Many people will agree with this statement, because on the surface all this means is that good people should be allowed to act freely and bad people should not. The problem is that aside from the obvious examples of evil (like cold-blooded murder or something), the definitions of good and bad shift depending on who makes the rules.
All of which is to say that what remains when you remove censorship resistance from crypto is hardly anything to get excited about. For lack of a better way to put it, I’ll point to a tweet by Bennett Tomlin of Protos and the “Crypto Critics’ Corner” podcast, who summed up this point of view succinctly, writing: “If crypto lacks censorship resistance, it’s just gambling and schemes.”
I think this is absolutely correct and an accurate characterization of crypto without censorship resistance. While there may still be money to be made in the casino-like, carpeted fringes of the cryptocurrency world, I find it unlikely that investors will be enthusiastic about lining up to champion this value proposition.
Crypto means absolutely nothing without censorship resistance.
Oh…and don’t forget privacy
But of course we should take this at least one step further. Censorship resistance without privacy doesn’t matter either. And that has been a problem with transparent networks like Bitcoin (which is very critical not anonymous; Bitcoin maintains a public ledger of transactions complete with identifying addresses and balances. It’s literally the opposite of anonymous, especially if you’re new to using the network).
This is something we saw in February 2022 when Canadian truck drivers protested a vaccine mandate. While the protesters were able to receive funds via Bitcoin, Ethereum and other networks, the transparency of these blockchains made it virtually impossible for the protesters to withdraw the money for fear that the Canadian government would freeze or suspend their bank accounts.
So it’s true that someone can send me bitcoin (BTC) even if the government doesn’t want me to receive it. That’s because the Bitcoin network is resistant to censorship. But if the authorities can trace the transaction and see that the bitcoin came from you to me, then it can do something about the fact that I received funds from you outside the Bitcoin network.
We need censorship resistance and we need privacy.
