On the Matter of Fungibility: Making Bitcoin a True Currency
Much has been made by critics and supporters alike on the matter of bitcoin’s viability as a widely used currency. On the one hand, it is decentralized and borderless, making it ideal for anyone seeking total control of their money without the inconveniences of centralized interference. Conversely, price volatility can be extreme, and there is a limited total supply of 21 million (or perhaps closer to 17 million if studies on lost bitcoin are true). One issue still persists — is bitcoin actually fungible? Does 1 BTC truly equal 1 BTC?
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What Is Fungibility?
Fungibility is a term that gets thrown around in privacy coin communities or in “real world” circles by economists discussing various commodities. Despite its reputation as an elusive concept, fungibility is a rather simple idea. A good is fungible if its units are the same and are interchangeable. For a governmental perspective, the United States Customs and Border Protection outlines it as per the following:
“According to Article 415 of the NAFTA, fungible goods are goods that are interchangeable for commercial purposes, and have essentially identical properties.”
Gold is gold. It can be marked and labeled, but at any time melted down and reset to its original form. The same can be said of other precious metals, such as silver or palladium. Crude oil is a fungible commodity. Stocks are also fungible. One (common ordinary) share of Amazon or Apple is no different to another. The concept can similarly be applied to individual tasks performed in a large construction project, or during the assembly of an automobile.
Notwithstanding the use of serial numbers to aid in law enforcement, fiat money is fungible by law. One U.S. dollar bill, no matter its source, is worth the same as another U.S. dollar bill.
Does One BTC Equal One BTC?
The advantages of bitcoin over fiat are well documented and cited ad nauseam by its advocates. When it comes to fungibility, however, one of bitcoin’s greatest advantages is also its greatest weakness: the blockchain.
The blockchain is a public ledger, bitcoin’s safeguard against manipulation. It cannot be retroactively altered. That comes with a privacy price. Several studies have shown that bitcoin transactions will be attached to some users forever. Those attachments are irreversible.
One of the first major victims of this was Ross Ulbricht, former chief of Silk Road. Back in early 2015, government agencies had already figured out how to track bitcoin transactions, even among more savvy users like the Dread Pirate Roberts himself. The FBI demonstrated to a jury how they tracked $13.4 million USD from Silk Road to the hot wallet on Ross’ laptop.
The Difficulty of True Anonymity
Research has been published on how to use bitcoin anonymously, which can be rather laborious not just for the average user but even the more technologically fluent. Hiding one’s IP address with spoofing or via a VPN, mixing coins with tumbling services, and purchasing anonymously are among the strategies that have been outlined.
In addition to the extra time spent anonymizing transactions, however, these steps come with increased financial costs. And taking additional anonymizing precautions are not foolproof anyway, doing little to eliminate the history of the coins prior to them being obtained — forever leaving them with their distinct historical markings.
Traceability, Law Enforcement, and Guilt-by-Association
The juggernaut of the Orwellian blockchain observers is undoubtedly Chainalysis, a company whose clients include financial institutions, cryptocurrency exchanges, and government agencies. They claim to have found the destination of all the coins lost in the Mt. Gox hack, though the information remains unrevealed, at least to the public.
The IRS has been contracting the services of Chainalysis since at least 2015, as their numbers indicate the vast majority of crypto profiteers are not reporting their earnings. The company touts plans to support the tracking of ten coins by the end of 2018, and just last April raised $16 million in funding from one venture firm, a sign demand for their services will only increase.
Police around the world are catching up to the traceability of bitcoin. Arrests using the blockchain are being made and will continue. One upside of all this is that ransomware creators are now at greater risk of being caught. The downside is the loss of privacy for those who are doing nothing wrong.
The Office of Foreign Asset Control (OFAC), operated by the United States Treasury, has added certain users of cryptocurrency and wallet addresses to the list of items and persons that could be blacklisted. If alleged illicit activity is detected from an address, it could theoretically be blacklisted from legally being a part of any future transaction.
An undesirable transaction could land someone on their SDN — “Specially Designated Nationals And Blocked Persons List” — placing such a person or entity on par with a terrorist organization in the government’s eyes.
The highest levels of law enforcement are honed in on watching the blockchain. Edward Snowden, the infamous former NSA employee who exposed many of the NSA’s surveillance programs, said his former employer has been working hard at tracking bitcoin. According to documents leaked to the public by Snowden, the NSA’s XKeyscore program has been used to watch virtually all online activity, without warrants or any due process.
The NSA has been specifically discussing tracking bitcoin since March 2013. Looking at this in the context of other NSA programs such as PRISM, it may not be known to the public for years, if ever, how extensive the NSA’s abilities are in tracking bitcoin and other cryptocurrencies.
The Bottom Line
The importance of fungibility cannot be understated as authorities’ tracking capabilities inevitably improve. Human error will result in innocent bitcoin users being caught in the crosshairs of law enforcement through no fault of their own. The advantages the blockchain brings to bitcoin concurrently render it, theoretically, less private than fiat currency or gold. The irony is rather chilling.
Criminal activity is a mere side issue, however. If, one day, bitcoin does achieve mass adoption, buyers and sellers have the right to keep their purchases confidential. The absence of alleged criminal behavior does not preclude the right to privacy — a right that probably faded decades ago.
There are a number of cryptocurrencies pursuing pure fungibility. Coins with privacy measures attempt to achieve fungibility by making their units indeed interchangeable. Unfortunately, these coins have felt the wrath of governments who have specifically addressed privacy-based coins as law enforcement concerns.
The U.S. military has been trying to crack these currencies since at least mid-2017. But even these coins aren’t flawless: past privacy issues have since been remedied in some cases, but have left older transactions performed prior to such code updates forever subject to traceability. It could also be argued coins with privacy offered only optionally do not provide pure fungibility.
The battle for financial freedom is still in its infancy. Bitcoin is still a newcomer in the world of money. It is our decentralized project to rise or fall with. Only by honestly addressing its current issues can we enable progress and improve down the road.
— This piece reflects the writer’s personal opinion and does not represent the editorial policy or views of Bitsonline.
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