Fungibility and Civil Asset Forfeiture

in #bitcoin7 years ago (edited)

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There is a massive risk in cryptocurrencies, especially if you hold them in 3rd party exchanges or 3rd party wallets where you don't have direct control over your money.

This is not just a minor risk, this is an extremely big risk, especially now that new Civil Asset Forfeiture or shall I call it, Direct Extortion schemes are being implemented.




It goes like this

  • Joe is an upstanding citizen, and not involved in any illegal activity, he keeps all his Bitcoins in an exchange
  • Joe buys a gift card from Jim in the Bitcoin community
  • Turns out that Jim is also a drug dealer
  • On the Blockchain it looks like Joe bought some drugs, when in fact he bought a gift card
  • The government now freezes and confiscates all of Joe's Bitcoins, because he is a suspected drug dealer
  • Joe is now crying, because he knows that forfeited funds will never be returned even though he is innocent

It's as simple as this, combine all these blockchain analytics firms that work together with law enforcement, the vulnerability of cryptocurrencies, which is fungibility, which means that not all coins are equal. Tainted coins could all be forfeited, which is ironic since probably all Bitcoins are now tainted, which means that the Government will just confiscate all of them.


Well here comes the new bill:

So since every single Bitcoin is tainted, which it is technically, and even if you are innocent, especially if you are innocent all your money can be confiscated, just based on a suspicion. That is how tyrannical this Civil Asset Forfeiture legislations are.

So every single coin that is held on an exchange can be looted. The bank or the exchange doesn't even need to file a SAR report, it's enough if they just use one of these blockchain analytics companies to track tainted Bitcoins.

Of course the degree of tainted-ness might vary and the Government might decide to only confiscate coins that are tainted at 70% distance from the source. After all, an all out confiscation would be too tyrannical, even for them.

So then basically, 1 or 2 degrees away from a criminal, all coins could be subject to confiscation, especially if innocent people are in contact with a criminal to 2nd degree.

For example:

  • A drug dealer sells some drugs in Bitcoin, then he sells a gift card to Joe, then Joe sells that gift card to Mary, this is a 2nd degree separation, well in this case both Joe's and Mary's Bitcoins could be confiscated even though they are both innocent.




IT'S EVEN WORSE, MUCH MUCH WORSE

Consider the following scenario, where innocent people can even be framed:

  • Jim is a drug dealer who sold 1 BTC worth of drugs on the Darknet
  • Jim sends out 0.01 BTC to 10 random people who are totally innocent, in order to frame them
  • Since everyone is just putting out their Bitcoin addresses in signatures on forums, it's really easy to find 10 patsies
  • Now all 10 random people who received 0.01 BTC from Jim are now drug suspects, even though they are totally innocent and unrelated to Jim, and all their Bitcoins can be confiscated by Civil Asset Forfeiture laws

So random innocent people can be framed this easily, even if they have absolutely no contact with the criminal whatsoever and don't even know the person, just receiving a free Bitcoin present from a criminal might include you on the suspect list as well.

Now of course if the coins are in your private wallet, then nobody knows who that is. But if the coins are going to your deposit address on an exchange, then it's bad.

You can't even change the deposit address on many exchanges, so once they link that address to you, you will be responsible for every coin that comes and goes to that address.

And why would Jim send out 0.10 BTC? Well, maybe to fool the investigators, if they have 10 more suspects then it steers away attention from Jim, who is anonymous, into 10 patsies who have their identities well known by KYC policies on exchanges. So the police will just go after the patsies instead of Jim, it’s much easier.


THIS IS A MASSIVE RISK FOR INNOCENT PEOPLE HOLDING BITCOINS, SO GET THE FUCK OUT ALL YOUR COINS FROM EXCHANGES!


In fact people should start using anonymous currencies like Dash or Monero, to at least break the link between tainted coins.

You see anonymity is more needed by innocent people than by criminals, exactly because of this problem!


Sources:
https://pixabay.com


Upvote, ReSteem & bluebutton


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Can you replace bitcoin with USD and read it again? If this is a law I think it is infirm - because every single bank account out there could get into trouble same as XBT accounts.

I am not based out of US, but to me recent moves from the federal government against bitcoins seem immature and lacking real understanding. My apologies if that hurts any national sentiments!

Exactly, but BTC is supposedly the currency that is for wealth protection, which it turns out to not be if the fungibility problem is not addressed.

Although in the fiat economy it's different, criminals mostly deal in CASH, and probably 95% of bank transfers are legal.

In Bitcoin almost all Bitcoin are tainted to some degree, unless it's just newly mined and sitting in a miner's account.

So the fungibility problem has to be fixed.

so which hardware wallets should rank newbie use?

I don't know, but probably it would be a good idea to not use hardware wallets that automatically download software from the internet.

Some hardware wallets have auto-update feature where they regularly download new firmware to the device, this is a huge security flaw.

I'd rather use hardware wallets that just offer you a software wallet which communicates with the hardware wallet, but nothing is downloaded into the hadware wallet.

Basically a read-only hardware wallet. Because we don't want any form of new software being added to the hardware wallet. Whereas the software wallet on the PC can be updated regularly, and a malware infection there doesn't expose the private keys from the hardware walet.

please be more specific.
name names.

Well for example the way I understand Trezor downloads firmware updates to the device, signed by the team with their signing key.

Now if that key were to be shared with the government like how they do in the UK:

Then the government can just easily backdoor that device, and possibly apply civil asset forfeiture even from hardware wallets.


So the hardware wallet must be read only. I don't know which one works like that, I haven't looked into them that deeply yet:

I think this one is decent:

But do your own research, it all depends on the random number generator, and I don't know whether that chip that they use is secure or not.

I have no more idea of the technical aspects than I would the technical aspect of neurosurgery.
that one looks fairly easy...cheap too...and they take bitcoin in payment?

Well I would say it's reasonably safe if used properly, there was also another hardware wallet I don't remember it's name that was also pretty decent, it doesn't just stored the coins safely but it also anonymized it, I don't remember it's name.

my greatest fear is to lock myself out.
too secure.

Then keep backups in secure hidden places that nobody knows about. There are many way to organize a secure storage of some coins, with multiple layers of backups. You just need to be creative.

You don't need hardware wallets at all. Simply create a set of paper wallets (each is a address-key pair) and charge each one with a small amount of coins. If you want to spend something, sweep one of them into a regular wallet like electrum. Since you charge only a fraction of your coins into one key, only this one fraction is at risk at once.

Use a decentralized exchange like Bitshares.org is my guess?

Yes that would be a good idea,but they don't have all altcoin support.

Plus there are already many more implementations that come out to addres this issue:

But also self-hosted wallets, like Electrum and others, Supernet's Agama Wallet is a good example of that.

Doesn't this act have to be passed?

From what I have seen it hasn't been passed. I found this article on the issue where the author seems to be pretty adamant about the fact that there is currently no technology available to get targeted individuals to forfeit their coins. I do understand what you are saying in regards to third parties, but ultimately it would depend on whether or not they are based in the US. Poloniex is registered in Delaware and Bittrex is based in Las Vegas Nevada, so they are basically screwed and anyone with coins on there as well (including myself).

Do you know where Open Ledger is based? And what are your thoughts on all of the self proclaimed anarchist libertarians who seem to support Donald Trump here on steemit, if their guy actually puts force behind this act? You think that would be the straw?

I don't know, the civil asset forfeiture laws are pretty broad, and there have already been cases where funds have been frozen, or even forfeited.

Even if it's not passed, the risk is still there it's just that it's smaller. If it does get passed, which I think it will, then the cat's out of th box.

Yes all major exchanges are from the US, and China already has capital controls and similar legislation, so no big exchange is safe.

And what are your thoughts on all of the self proclaimed anarchist libertarians who seem to support Donald Trump here on steemit, if their guy actually puts force behind this act?

I think a lot of the support behind him is because he promised to get some jobs back, which I don't think he will deliver upon.

So peope will wake up eventually. What I am more worried about is that this alt-right has inspired many Nazis, both in the US as in Europe, and that is a bigger concern.

I am from Washington D.C., and attended college in Florida. I know people don't need an excuse to be hateful in the States. I am currently living in the UK and right now vacationing in Spain and while I have come across some short sighted ignorance and read a few shady stories in the news, for the most part their version of conservative is the U.S. version of Democrat, and Europe would not tolerate putting any real authority or credibility behind hateful rhetoric, imo.

Yes I like how Europe is more tolerant in this matter ,it's basically the most civilized society right now in the entire world.

That being said, the EU itself is pretty tyrannical, their regulations are strangling small businesses, and tax levels are through the roofs in Europe. This is a big problem.

You're right but just like Trump, Brexiters in the UK are doing little to squelch the rumors that their is a racial agenda associated with their pursuit of fair trade and taxation without representation. Those in power fear they won't achieve their objective without the radical conservatives on-board, radical conservatives that are the last thing you would ever think of when thinking of a Theresa May or Donald Trump, but somehow find themselves in the same boat but don't denounce it.

A set of encrypted paper wallets is the best way to go, imho.

Best post of the day.
Clear, concise, credible.
Top effort.

I am well pleased to you...☺☺☺☺

The theme of my girlfriend is interesting.I wish you a happy day possible support

Well, first, I don't think this bill will pass. It's a shot across the bow though. Second, if such confiscation began, BTC would crash. All the confiscators would get from it would be hassles. Any confiscation scheme would have to tread lightly to avoid this problem, and I'm not aware of such a tendency on the part of confiscatory agencies.

Third, this is why I'm not invested in cryptos, except for Steem, and my investment is limited to the time I spend writing and curating. It's not just this bill, but the general insecurity of digital devices, their failure rates, and my own history of data loss that causes me to resist the lure of the profitable volatility.

I am glad it's really worked out well for folks that are in it, and hope they all reach their dreams, but I'm just not that guy.

I really hope people that are invested in cryptos do diversify - and I don't mean by having some altcoins. Get a bag of junk silver. JP Morgan is going to cash in on it's long suppression of silver prices someday, and silver will appreciate incredibly in a very short period of time. Some solid stocks, bonds if you have the assets to park, etc.

Diversification to me means not just several different things of a type, but different types of assets.

Also, asset forfeiture of fiat, and other assets, continues apace. No asset class is safe from confiscatory agencies. Cryptos are especially vulnerable, imho, because you can't dig a hole in the back yard and hide any in it.

Thanks for the provocative post.

While computer security is a huge issue, I think the cryptocurrency class is the most resistant to confiscation.

Gold held in a vault can be confiscated, and gold hidden in the garden can be spotted by topography tools.

Cryptocurrency on the other hand, ignoring the compsec risks, can be hidden in a haystack the size of 2256 bits.

Interesting, thanks, following you

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