Bitcrime to undermine fungibility of bitcoin

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Bitlegal spoke with the German coordinator of the Bitcrime project (a joint funded Austrian and German research project). Part of their mandate is to look at the development of investigative tools to identify suspicious activity on the bitcoin blockchain for use by police authorities. It is important to note that this study relates exclusively to bitcoin and not any other virtual currencies. The Austrian part are looking at ‘offchain’ data correlation work to use social media or similar to uncover public addresses of bitcoin users.

Although this is a software building and empirical research project a component of the Bitcrime project is policy development.

It is Bitlegal’s initial understanding on the policy side that Bitcrime intends to investigate the regulation of bitcoin itself; an antithetical position to the trend of regulating intermediaries such as exchanges – note that the EU commission will designate virtual currency exchanges as ‘obliged entities’ in the 4th Anti-Money Laundering Directive before end of year.

Conscious of the practical limitations of enforcing regulation on a decentralised protocol, some of the enforcement mechanisms being researched by Bitcrime are more subtle but nonetheless, in the view of this publication, extremely damaging.

The suggestion was made that due to bitcoin, in the personal view of a representative of Bitcrime, not being fungible, that a law could be passed whereby if a bitcoin transaction had been tainted (i.e. associated with a known criminal event on the blockchain – ransomware address or hack of exchange) that those bitcoins would be rendered worthless by statute. Meaning bona fide purchasers of bitcoins off exchanges would now need to check the ‘taint’ of the bitcoins they are buying or suffer the consequence of receiving worthless bitcoins. This law would be akin to you having to check cash that you receive to see if a serial number is associated with a known bank heist or if the paper is laden with cocaine.

We emphasize, that the subject of the policy study by Bitcrime has not reached any final conclusions as yet. The solution may be discounted by Bitcrime itself as being entirely impracticable. However, Bitlegal is greatly concerned with attacking bitcoin’s potential fungibility and, indeed, bona fide purchasers of virtual currency have to be protected.

The US understands that bitcoin is fungible. US marshals seize bitcoins then sell them into the open market. Those bitcoins then move back into circulation. The manner to deal with ‘taint’ is to have a provision in the law to allow bona fide purchasers of tainted bitcoins to be able to hand them to the police for them to auction with the proceeds going to the bona fide purchaser.

If you are concerned with the above contact info@bitlegal.io with your views and we will condense them and submit to Bitcrime.