PowerKee’s Bastion of Privacy #23 — Bitcoin’s first mining pool with censorship practices
North American companies Marathon Patent Group and DMG Blockchain have launched a mining pool, Blockseer, that will only append Bitcoin blocks that include transactions which comply with rules set by the U.S. Office of Foreign Asset Control (OFAC). The OFAC compliance rules are focused on the administration of financial sanctions set by the United States government.
Blockseer recently mined its first OFAC compliant Bitcoin block. The initiative is an extremely contentious matter.
In the latest Bastion of Privacy, we detail the imperatives of OFAC and the move by mining pools and miners to come into compliance. We also consider the broader implications for the Bitcoin network and why privacy-focused networks emerge as a natural alternative.
Development Update: We extended our team with an additional QT Developer to speed up the final implementation of the wallet design. The network works, the basics are ready, defining UI/UX and we’re ready to go. The wait is over soon.
Blockseer Bitcoin Mining Pool
Marathon is one of the biggest Bitcoin mining companies in North America. In March 2020, the company launched a BTC pool, with a clear goal of operating under the regulations of OFAC.
In recent years, the rate of cyber criminality has been on the rise. Some of these incidents have been facilitated using cryptocurrencies. Cases of money laundering, extortion, and theft through the use of cryptocurrency technology have all sprung up. This has consequently led to an increase in the number of cryptocurrency wallet addresses added to the restricted list of OFAC.
The OFAC regulations aim to combat criminal activities. However, censorship-resistance is one of the core properties of Bitcoin and attempting to introduce censorship is a contentious matter.
Implications for Bitcoin
The mining pool initiative by Marathon and DMG has introduced some degree of censorship into Bitcoin. The mining pool segregates Bitcoin mempool transactions by using the DMG Walletscore analytics tool which determines what transactions are compliant with OFAC guidelines. This is similar to the risk appraisal system that is adopted in the traditional banking industry.
The initiative may be welcomed by mainstream practitioners and seen as a move to sanitize the cryptocurrency industry. However, the far-reaching impact may have much more profound consequences.
Many view it as a threat to some of the fundamental principles of the Bitcoin network like fungibility and censorship-resistance. Segregating Bitcoin transactions could easily impact fungibility by creating separate market prices for “compliant” Bitcoin and “tainted” Bitcoin.
While some view it as a long-term concern, there is little to worry about in the short-term. Blockseer is the only mining pool that has such censorship practices in play. While a block appended by Blockseer may censor a certain transaction, other mining pools are agnostic and will typically include the transactions with the highest fees.
Bitcoin Properties at Risk?
One thing is for certain. Initiatives like Blockseer increase the attractiveness of privacy-focused cryptocurrency networks like PowerKee. The move to tightly regulate cryptocurrency will not stop and is likely to intensify. Other mining pools may begin to launch similar initiatives, increasing the degree of censorship in the Bitcoin network.
PowerKee has received reports that North American mining pools are already beginning to carry out KYC on their connected miners. Any miners that use addresses linked with illicit activities will certainly be flagged and blocked.
OFAC-compliant initiatives still represent a minority of the Bitcoin ecosystem. Nonetheless, they may represent a threat to the key properties of cryptocurrency networks like censorship-resistance and fungibility. Privacy-focused cryptocurrency networks emerge as one of the only options where users can be assured that the properties of the network are protected long-term.
About PowerKee
PowerKee is a cryptocurrency network that makes privacy easy. Users can transact cheaply and instantly while maintaining anonymity. The PowerKee protocol uses a mixture of zero-knowledge proofs and coin mixing to provide strong privacy assurances to its users.
