House Caucus calls for “pseudo-anonymity”, reversible transactions – but what is Bitcoin already doing?

Laws need to be passed to allow the unmasking of those involved in digital asset transactions, the co-chair of the U.S. House of Representatives blockchain caucus said this week. Illinois MP Bill Foster (D) also called for bitcoin transactions to be reversible to reduce fraud and other illegal activity. He might be surprised to discover that several of these options are already built into the rules of Bitcoin.

Foster admitted in a virtual seminar that his proposals are likely to “drive the crypto purists berserk,” but added that the action would be necessary before people could feel confident about investing a large portion of their net worth in digital assets .

“You’re going to want that security blanket from a trusted third party who can solve the problem,” he said.

Foster also suggested that courts should have the ability to discover the identities of users of digital assets in the real world with a “very tightly guarded key” and expose them to investigators while allegedly leaving them unknown to the general public.

As examples, he cited recent ransomware / extortion attacks that disrupted energy and supply chains, such as the one on Colonial Pipeline.

Can bitcoin be compliant? And how?

For a long time, even blockchain enthusiasts privately believed that it was hard to imagine how Bitcoin could coexist alongside (or within) a highly regulated financial system. The anarchist and rebellious rhetoric spread by many proponents over the years has often suggested that Bitcoin should counter or replace the current system instead of working with it.

However, there are flaws in these beliefs. Bitcoin transaction records are public and permanent to start with. While Bitcoin addresses allow a certain degree of privacy with their pseudonymity, they are not (and never were) intended to be anonymous.

Bitcoin inventor Dr. Craig S. Wright has stated several times that it was never his intention to create a lawless payment system. He has spoken at length about how trust collapses in a society where everyone wears the mask of anonymity.

He also raised the issue of “reversible” transactions on the Bitcoin network. Transaction processors (miners) could freeze certain UTXOs in connection with criminal activities following a court order. Anyone who can prove previous ownership of stolen assets can get their assets back.

While no transaction on the Bitcoin blockchain can be “reversed” per se, it is still possible to modify the records to correct a situation where assets have fallen into the wrong hands. This is the same as Bitcoin’s base in double-entry bookkeeping – instead of deleting a record so it never existed, blockchain records show the original transaction and how it was modified, when and by whom.

The ability to take these measures already exists by law, and there are economic and legal incentives for transaction processors to do so. What has not yet happened is an actual case where orders have been issued to freeze and / or return stolen coins.

That could change soon – Dr. Wright himself fell victim to a 111,000 bitcoin theft in 2020 and delivered legal notices to the developers at BTC, BCH, and BSV in February 2021, informing them of their responsibility to help recover the data.

Rep. Foster demanded that digital asset transactions be “pseudo-anonymous” – but that is already the case. Even without a court order, investigators have various forensic options available to link addresses with other blockchain data sets.

If anything, it is changes to the Bitcoin protocol since it was first released as software that have promoted greater anonymity and made transactions less traceable. Segregated Witness (SegWit), the Lightning Network’s payment tier, and (more recently) the Taproot “upgrades” to BTC have helped make transactions “more private” while adding Schnorr signatures to BCH comes with similar promises .

The IRS has named Lightning, Schnorr signatures and “privacy coins”, which are geared towards total anonymity, as worrying problems.

Like it or not, Bitcoin and other digital asset advocates like it, Bitcoin was designed from the start to conform to both human and technological laws. Rep. Foster and the blockchain caucus might be recommended to look at BSV, the only blockchain still following Bitcoin’s original 2009 protocol, with a “set in stone” rule that its basic functioning will never be changed.

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