Britcoin escalates the war between governments and crypto

Since the Bank of England’s announcement a few weeks ago that it would rapidly develop a digital currency nicknamed “Britcoin,” central bank digital currencies, or Govcoins as they are sometimes called, have been all the rage.

Reportedly, the UK government will take responsibility for the maintenance of a digital payment network – like a subsidized version of PayPal. This will make transactions faster and cheaper, especially for money transfers such as those required by major banks.

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Is it in the public interest to subsidize PayPal? Is it worth raising taxes to finance the construction of efficient payment channels between banks? Maybe, maybe not.

But these are not really the questions that concern the Bank of England, or the United States, with its theorized e-dollar, or China, with its digital Yuan. The desire for faster and cheaper transactions between banks is not new – nor is the bare-bones blockchain imitation that they plan to use.

What’s new, however, are the signs that crypto may be more cordial than its critics give it credit for. The Bank of England’s announcement comes after the crypto industry appears to have weathered its fourth major ‘winter’.

The first, the so-called “Flash Crash”, happened in 2011, two years after the Bitcoin Whitepaper. The second was prompted in 2014 by the devastating hack of Mt. Gox, at the time a major crypto exchange. The third, in 2018, was caused by signs that tech companies like Google and Facebook were getting sour on cryptocurrency. Each time, the setback revealed that the commitment to the decentralization project went a little deeper than imagined. This past winter stretches back to 2021, and centers around government efforts to suppress and prosecute public figures such as Do Kwon and Sam Bankman-Fried.

But this too seems on the verge of thawing. The collapse of Kwon’s stablecoin Terra and Bankman-Fried’s FTX has been largely shouldered by the crypto community. The global market cap for crypto is back above $1 trillion. And perhaps most importantly, there is resurgent interest in something called “stealth addresses.”

In order to understand stealth addresses, it is important to understand that under slightly different circumstances, it is likely that governments could have developed blockchain technology for themselves. Why? Because everything that anarchists love about the blockchain—like its public consensus and permanent record—appeals to totalitarian governments for exactly the opposite reasons. Intelligence that can record any transfer of value as well as any transfer of information is about as perfect as intelligence can be. This is especially true when imagining the role mass transit plays in cities like Shanghai, where it’s not hard to imagine reconstructing someone’s day by studying where and when they paid their subway fare.

What spurred the Chinese government’s crackdown on Bitcoin mining in 2021 was not fear of the blockchain, but fear of Bitcoin. The prefix “crypto” in “cryptocurrency” refers to the ambitions of anonymity built into the design of the blockchain, but not fully realized. Since a decentralized blockchain allows users to trade with each other without the approval of a central authority, users are not tied to anyone else and are never forced to link their real identity to their virtual address – as we do all the time at airports, while crossing borders , or in public buildings.

The PayPal app logo seen on a mobile phone in this illustration image. (Reuters)

There are, to be sure, ways to link someone’s virtual address to their real-world identity. More thorough monitoring networks or precise monitoring of energy consumption would do the trick. But both of these are extremely costly, and governments will often simply allow virtual addresses to remain anonymous. As demonstrated by the Canadian government’s approach to punishing truckers who took part in last year’s Freedom Convoy, freezing certain online accounts is often just as effective as suggesting that companies with specific physical locations – which could be attacked or shut down – should refuse. to allow virtual accounts to exchange their coins for fiat currency. This works since, courtesy of the ledger, the location of the blacklisted coins is always publicly known.

However, this is a risky strategy for governments to adopt. First, it requires playing on Bitcoin’s terms. Second, it incentivizes developers to improve network anonymity, thereby giving rise to exactly the kind of tit-for-tat that the international network of visionary, semi-rabid computer geniuses behind Bitcoin and Ethereum love more than anything else.

The Freedom Convoy fiasco, for example, has shifted the attention of the cryptocurrency community to coin mixers, which re-anonymize blacklisted coins by shuffling them around in a pool of “clean” coins. This move was met by the attempt to shut down coin mixer Tornado Cash – which has only resulted in the proliferation of new privacy schemes such as stealth addresses, which as Ethereum Foundation CEO Vitlaik Buterin pointed out in a recent blog post may well be next. major move in the cat-and-mouse game played by blockchain developers and the world’s governments. The basic idea of ​​”stealth addresses” is similar to a money laundering front. If governments can simply blacklist accounts that they know have “dirty” coins, why not open a fake account – a front that can receive the coins openly and then secretly pass them on to a real account?

Of course, the trick-or-treating game will not end there. Governments can respond by continuing to increase their investments in quantum computing, which will appear to render most anonymization techniques obsolete. And developers will fight back by accelerating research into quantum-resistant algorithms, such as cryptographic lattices.

Ultimately, this is not a game that plays to the strengths of centralized governments. Indeed, as China realized early on, it’s a game governments are destined to lose—at least as long as the blockchain remains decentralized, with no way to link an online criminal wallet to an arrestable criminal in real life.

While neither the Federal Reserve nor the Bank of England has ruled out the possibility of a distributed ledger underpinning their digital currency, it seems overwhelmingly likely that they will follow China’s lead and centralize both the issuance of new tokens and the approval of new transactions. And it is hard to imagine that they will follow the examples of cryptocurrencies such as Bitcoin or Ethereum by coding a hard cap on the printing of new tokens. Both of these facts should raise serious questions about the immediate practical utility of a CBDC — especially one that, as the Fed has made very clear, is “a means to expand safe payment options, not to diminish or replace them.”

Although the clear benefits of a digital dollar are few, the possibilities for government surveillance of users are potentially many. More than anything else, therefore, CBDCs are an attempt to neutralize the technology by creating a focal point for institutional enthusiasm that leans towards digital currencies and away from crypto. It’s betting on people’s passion for cryptocurrency over blockchain, or digital technology, or just the new – and it’s a low stake.

At the same time, the Bank of England’s announcement also suggests a shift in tactics for governments that had previously seemed perfectly willing to continue playing cat-and-mouse. It represents a re-evaluation of the overwhelming advantage that cryptocurrency gives developers when they are allowed to work on their home turf. It therefore constitutes a gesture of respect for the robustness of the decentralized blockchain, while at the same time suggesting a future in which blockchain technology is polarized between the extremes of anarchy and total control, rather than one in which it can be productively mobilized for social good.

In sum, the arrival of state-backed cryptocurrencies is a significant escalation in the shadow war that has been waged between governments and developers for the past decade, and one that does not seem to be pointing towards compromise.

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