The Alert Key. By Craig Wright

Ledgers and Design.
By Craig Wright
18 Mar 2020

https://craigwright.net/blog/alternative-coins-systems/ledgers-and-design/

The Alert Key

Removing the alert key does not remove the legal requirement to validate the source of funds. Customer due diligence (CDD), know your customer (KYC), and anti-money laundering (AML) laws apply even in the absence of a simplified system that would allow for the reporting of proceeds of crime and stolen coins.

The Bitcoin alert key was not added merely because of the vulnerability that had been announced a week earlier. I had been working on the alert key since July 2010. The patch to the vulnerability was announced on 15th August, 2010, and indeed, the alert system would be good for the notification of vulnerabilities. But here lies not the reason that Bitcoin had an alert system. The patch was created rather expeditiously, in response to the overflow bug and as a temporary disabling of certain prescription operators. My implementation of script had a lot of vulnerabilities at the time.

I avoided talking about such things because the inevitable tinfoil-hat brigade started talking about government shutting down Bitcoin. Government could always shut down Bitcoin. It still can. The US government can simply mandate banking restrictions in the same manner that they did on Black Friday across the gambling industry. Bitcoin could be isolated very quickly. By example, there are no exchanges operating as legal entities in China any more. All of them operate in jurisdictions that are controlled by the US. The US government would seize and control any Chinese, European, or American exchange as quickly as it desires. Even if Chinese miners decided to boycott an order requiring them to freeze funds, they would not be able to.

Any associated funds flowing to any exchange at any point following a freezing order will effectively be burnt. They may sell for fractions of a penny in the dollar, but even so, it is unlikely. The consequence is that Chinese miners or any others that sought to avoid a court order would find themselves earning around 1/1000 of the revenue of the miners that are following the court order. Very quickly, honest compliant miners would win. The cost would not decrease for the dishonest minor who seeks to breach the rules.

The alert key would protect users. In quickly being alerted and notified of assets that are frozen, individuals would not receive stolen funds or be deceived into believing that such had value.

“Send to address” would block an innocent user without notice from accidentally sending to a Bitcoin address that is covered by a freezing order. The system would allow individuals to engage in commerce and trade from different unblocked addresses, without violating court orders.

By August 2010, I was already rather disillusioned with many of the people involved with the Bitcoin project I had started. I had also become more sarcastic at the time. I had planned to implement further changes. And if it wasn’t for all the craziness and people seeking to create dark web websites that would use Bitcoin, I would have at the time. The thing is, it is still incredibly easy to mandate and do. My full version of a regulated Bitcoin system would have been far easier than what’s coming now. If it wasn’t for all the fools out there thinking that government is going to invade them and steal their bitcoin, things could have worked without anywhere near as much friction as shall be coming.

One thing I learned the hard way is that everything that should be simple becomes incredibly difficult with the “BTC community”. Many people have lived in the tinfoil-hat version of the world:

No Taxes

There is no way for a third party to intercept transactions of Bitcoins, and therefore there is no viable way to implement a Bitcoin taxation system. The only way to pay a tax would be, if someone voluntarily sends a percentage of the amount being sent as tax. [1]

The student who created the report failed to analyse or understand Bitcoin to any extent. Rather, without seeking to understand the basis of accounting systems or how double-entry bookkeeping works, they falsely reported that Bitcoin was a system that gave users complete freedom to effectively do anything they wanted with their money, even if it was illegal. They went on to say that there was no way to intercept Bitcoin transactions and that there would thus be no way to implement a taxation system on Bitcoin. Right now, there are many forms of cash-based transactions that are not intercepted by government, and yet government manages to tax both businesses and individuals. In other words, even if bitcoin could not be seized or intercepted, the scenario does not preclude taxation. It is unfortunately such naïveté that has formed the basis of misconceptions around what Bitcoin is and how individuals act.

Taxes has existed on gold, and tax has existed in the cash economy. You do not get to opt out of the taxation system because you use Bitcoin. Nobody will ever own all their assets because of Bitcoin and a blockchain, and even if they did, it would be irrelevant. If you don’t pay your taxes, you go to prison, whether you use Bitcoin or not. If you fail to pay your tax, assets can be sequestered and taken from you. There is no system that changes the scenario; neither Bitcoin nor anything on a blockchain will ever alter the rules. At no point did I say Bitcoin would stop tax. The childish notion that Bitcoin could remove government or even help people avoid tax has no basis in reality. It has nothing to do with whether you think tax should be voluntary, it is a fact of life.

Employers and others will simply report you. They will maintain your identity in the way I envisioned Bitcoin to work, which is the way I presented in the white paper. Privacy will be maintained as individuals and organisations save identity data. Your employer will still gain deductions from your employment payment or salary, and they will report them to the government. More, they will report them with a fully auditable and traceable record. So, rather than removing tax, the introduction of a blockchain-based payment system will simplify the facilitation of tax without fraud or evasion.

No Risk of “Charge-backs”

Once Bitcoins are sent, the transaction cannot be reversed. Since the ownership address of Bitcoins will be changed to the new owner, once it is changed, it is impossible to revert. Since only the new owner has the associated private key, only he/she can change ownership of the coins. This ensures that there is no risk involved when receiving Bitcoins. [1]

Non-reversal does not mean that bitcoin cannot be seized or taken from you. You do not own bitcoin because it’s on the blockchain, you own bitcoin which are stored in your wallet as indivisible tokens. Each bitcoin is made up of 100 million satoshi. There are no fractional satoshi. Each satoshi is an indivisible isolated token. The registered movement of control or possession of tokens simplifies micropayments. It does not do anything to remove the need to track ownership and larger values. Nobody is going to bring up the effort of reporting, following or tracing, and recovering five dollars’ worth of bitcoin. In small amounts, bitcoin acts as cash. For all of the BTC camp who want digital gold, the thing to remember is that gold has nothing to do with avoiding the law. If you buy and sell USD10,000 worth of gold, you do not own it unless you show ownership records. The purchase requires that you maintain information about the exchange. The same applies to bitcoin.

One of the most fundamental errors made with bitcoin stems from a failure to distinguish between a right and its record. The blockchain itself is a registration system. As such, the blockchain acts to maintain records of rights. The blockchain does not represent the rights themselves. Individuals hold bitcoin tokens in their wallet. Blockchain as a register is distinct from the rights to property itself. The recording of a transfer on the blockchain is distinct from the rights to the tokens being recorded. As a register, each blockchain-based system and even uses within the blockchain will function differently; it will depend on the form of the token whether it is fungible or linked such as in the case of a coloured coin.

Bitcoin is property and not a mere bearer instrument. Identity was always incorporated into the system presented in my white paper. For small transactions or casual exchanges, as would be carried out with cash, there is no requirement to legally mandate the capture of identity. In the event that an exchange passes certain threshold levels, there are requirements for the exchange to be fully documented and the identities of each party to be known. Know your customer (KYC) legislation exists in most Western nations and many others. You don’t get away from it because you use bitcoin. The error people make lies in believing that they own bitcoin merely because they hold it. You own bitcoin when you can prove, accordingly, the source of funds and how it was paid for. To own bitcoin, you require good title.

Bitcoin will not be reversed for small casual payments. I was very clear about the scenario in the white paper, where I said financial institutions or payment intermediaries who need to mediate disputes add costs. Here lies the weakness of the trust model, which is not that there is trust involved. As I said:

The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions.

Bitcoin reduces the minimum practical size of micropayments, allowing them to be securely transacted between parties over the Internet. You do not remove the cost of mediation on large cryptocurrency exchanges. You do not remove the cost of mediation when using bitcoin worth over $10,000 (with the amount depending on the country you are in). The part of the same sentence that people cherry-pick is the following:

The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services [emphasis added].

“Nonreversible services” are limited in scope. They involve small casual transactions. Blockchains do not stop courts from issuing orders such as a proceeds of crime order requiring changes to be implemented.

The big lie that is promulgated is that non-mining nodes would do anything at all, ever.

Non-mining nodes are simply slow, useless systems that act as ‘sibyls’ on the network, with people who lie about them to deceive regulators and defraud investors. They serve no purpose.

The lie of the ‘user-activated soft fork’ (UASF) node was told with the sole purpose of misleading regulators. You cannot simply fork Bitcoin towards a UASF protocol, while a freezing order would apply to both the un-forked protocol and everything to do with the forked protocol. The asset that you fork off with your non-mining nodes is still controlled by miners and exchanges. Any exchange that decides to use or list the new asset will be criminalised. Any coins following the frozen coin can indeed be followed and, under property rights, seized.

You see, it is not just a matter of you having bitcoin; if you don’t have good title to the bitcoin, and you don’t maintain all the identities concerning how you got it, someone can come knocking on your door and require that you give it up or, equally, give up the value in cash that corresponds to the amount of bitcoin you refused to hand over. Failure to do so can be covered under contempt of court orders and more.

Bitcoins Cannot be Stolen

Bitcoins’ ownership address can only be changed by the owner. No one can steal Bitcoins unless they have physical access to a user’s computer, and they send the bitcoins to their account. Unlike convential <sic> currency systems, where only a few authentication details are required to gain access to finances, this system requires physical access, which makes it much harder to steal. [1]

It was stupid to think so when it was first said, and it remains stupid to think so now. Bitcoin can be recovered. The reason bitcoin won’t be stolen in large quantities, even though it has been in the past, is that it can be recovered from the thief.

When I said, “Imagine if gold turned to lead when stolen”, Bitcoin was still in the alpha phase. The alert key was not complete; code that would enable nodes to follow court orders and alert on freezing orders was still on the drawing board. Identity systems had not been created.

They have now. The system, in its entirety, is possible now.

And once it is possible, it is possible everywhere. As governments understand Bitcoin and regulators see what they can do, it won’t matter that you want to make it what you call a privacy coin; you will come under regulations. In the future, when criminals steal your bitcoin, it will be recovered. When pay money or tokens or other things based on the Bitcoin blockchain or a related system are extorted, they will be returned. As proceeds of crime orders go through, nodes and merchants are all alerted such that you have instant knowledge of the keys that you should not transact on. And so it will start happening, throughout the year. It won’t matter whether you’re on Ethereum, Monero, Zcash, the Lightning Network, or any other system.

Bitcoin is not encrypted. Consequently, if you want to look at ‘code is law’, know that governments can force a change of code. Know that court orders can force a patch of code. Know that Bitcoin was designed to be a commercial system:

The current system where every user is a network node is not the intended configuration for large scale. That would be like every Usenet user runs their own NNTP server. The design supports letting users just be users. The more burden it is to run a node, the fewer nodes there will be. Those few nodes will be big server farms. The rest will be client nodes that only do transactions and don’t generate. [2]

It does not matter if you believe in proof-of-stake or other alternative consensus methodologies, any blockchain-based system will consolidate, always. As Bitcoin scales, the burden of running a node increases. As Bitcoin increases in value, the burden of running a node increases. The only way to stop the burden existing on a node is to keep things small — not the node, the network. The network involves the payment system, the exchange system, everything. As I surmised, Bitcoin has now passed the threshold.

Users were always supposed to use simplified payment verification (SPV). Nodes were always meant to be processing systems that ended up in data centres. Exchanges come under money handling rules. They always did. The distinction now is that the volumes surrounding Bitcoin or ‘cryptocurrencies’ — and I hate to use the term ‘cryptocurrency’, because bitcoin is nothing like it — have hit a tipping point. We will start to see the implementation of stricter money handling rules and criminal organisations such as Binance being charged for their crimes.

The promise of Bitcoin lay never in removing government. The promise of Bitcoin lay in micropayments and a system that delivered an honest ledger. People should look up the word honest in the dictionary:

Meaning of honest in English

honest

adjective

UK /ˈɒn.ɪst/ US /ˈɑː.nɪst/

telling the truth or able to be trusted and not likely to steal, cheat, or lie:

She’s completely honest.

I’d like you to give me an honest answer/your honest opinion.

He had an honest face (= he looked like he could be trusted).

To be honest (with you), I don’t think it will be possible. [3]

Honest nodes, or the operators of nodes that are honest, don’t involve stealing. Like it or not, nodes enforce the rules. Rather than merely relying on the Cambridge Dictionary, we can go to Black’s Law Dictionary:

What is RULE, n?

1. An established standard, guide, or regulation; a principle or regulation set up by authority, prescribing or directing action or forbearance; as, the rules of a legislative body, of a company, court, public office, of the law, of ethics. 2. A regulation made by a court of justice or public office with reference to the conduct of business therein. 3. An order made by a court, at the instance of one of the parties to a suit, com- manding a ministerial officer, or the opposite party, to do some act, or to show cause why some act should not be done. It is usually upon some interlocutory matter, and has not the force or solemnity of a decree or judgment. 4. “Rule” sometimes means a rule of law. Thus, we speak of the rule against perpetuities ; the rule In Shelley’s Case, etc. [4]

Like it or not, Bitcoin acts within law. No system of rules in society, in fact, acts outside of law. Welcome to Bitcoin; as I’ve said before, it is not a system that allows for dark web markets and crime, but rather one that economically disincentivises them, by increasing the cost and adding a permanent record, allowing every malfeasor to be tracked.