 |
| Riot Platform's Rockdale, Texas facility, North America’s largest Bitcoin mining farm by developed capacity [source] |
Can a network that has been marketed as being resistant to government power be harnessed by the U.S. administrative state in order to attain its foreign policy goals?
Sam Lyman, an executive at Riot Platforms, a bitcoin miner, opens the door to the topic by suggesting that bitcoin can become a tool of U.S. economic statecraft, and the way to do so is by having the U.S. government buy a strategic reserve of the stuff.
I agree that bitcoin can be used as a tool of U.S. economic statecraft, but disagree on how. There's absolutely no need for the U.S. government to buy any bitcoin in order to lever the Bitcoin network for foreign policy purposes. Buying bitcoins would only waste scarce resources, driving up the price to the benefit a select few speculators. No, the U.S. already has the means to lever the bitcoin network, and that's by leaning on the U.S. private sector's dominance of bitcoin mining, of which Lyman's own Riot Platforms is a big player (see photo at top).
The U.S. controls 38% of all bitcoin mining capacity, a big share of that being in Texas. Mining is a word people use in place of "maintaining the network." When a bitcoin transaction is made, miners are the folks who verify and process it, a number of miners often banding together to form pools for that purpose. Without miners, the bitcoin network ceases to function.
How to lever the Texas bitcoin mining nexus for the purposes of statecraft? In short, the mining nexus must be brought on par with its bigger cousin, the New York banking nexus, which the U.S. government already harnesses to further its foreign policy goals.
Any American banker that deals with a foreign individual or entity that has been designated, or sanctioned, by the U.S. government risks a penalty, either monetary or jail time. Sanctioned individuals are generally folks living overseas who are deemed to be in conflict with the U.S. foreign policy interests. And so U.S. banks, the largest nexus of which is based in New York, try to avoid punishment by cutting sanctioned names off from their banking platforms, thereby exporting American foreign policy to the rest of the world.
By requiring Texas's bitcoin miners (or the pools of which they are members) to abide by the same standard as banks, don't deal with bitcoin users who are deemed detrimental to U.S. foreign policy goals or you will be punished, the Bitcoin network would likewise become a platform for extending American foreign policy goals to the rest of the world. This would oblige Texas miners to comb over sanctions list and offboard blacklisted individuals, just like bankers currently do. With 38% of the world's mining capability in Texas and a few other states, that's a sizable amount of U.S. influence.
But that's only the beginning. There are ways to further upgrade bitcoin's capability as a tool of sanctions-based statecraft. When the U.S. sanctions program was still in its infancy, the punishment for breaking U.S. sanctions was generally limited to Americans individuals and entities. Over the last decade or two the U.S. has been extending punishment extraterritorially to foreigners, by arguing that when a foreigner "causes" an unsuspecting U.S. entity to process sanctioned transactions, then the foreigner is themself criminally liable under U.S. law for sanctions evasion.
An example may help. A decade ago a large Turkish bank called Halkbank processed transactions for sanctioned Iranians. Nothing illegal about that. A Turkish bank isn't under U.S. jurisdiction, and thus it can deal with any customer the Turkish government allows it to, even one that has been blacklisted by the U.S. What got Halkbank in trouble with the Department of Justice is that the transactions it processed passed through, or transited, the bank's correspondent accounts in New York. The fact that it had "caused" its New York banker to provide financial services to sanctioned Iranians (see the language below) was enough for Halkbank to be criminally indicted in New York for sanctions evasion.
 |
| The crime of causing others to violate sanctions [source] |
The same framework could be extended to Texas bitcoin miners.
For instance, if a Turkish crypto exchange were to send some bitcoins to a sanctioned Russian, and this transfer was processed by a Texas mining farm or pool, say Riot Platform's Rockdale facility, that would now give the U.S. government the hook it needs to charge the Turkish exchange with sanctions violation. By "causing" Riot to process a prohibited transaction, the Turkish exchange is itself criminally liable under U.S. law. To avoid that possibility, the Turkish exchange may choose to proactively adopt the U.S. government's sanctions list, thus acting as a vessel for conveying U.S. policy on Turkish soil.
The threat of punishing foreign actors for "causing" U.S. entities (whether those be miners or bankers) to process sanctioned transactions acts as a force-multiplier of U.S. foreign policy goals. Not only do U.S. financial institutions export policy, as was traditionally the case, but now foreign institutions are nudged into importing it, too.
To sum up, if folks like Lyman were genuinely serious about harnessing bitcoin as a tool of U.S. foreign policy, they'd be calling for the U.S. government to apply to miners the same sanctions standards that currently apply to regular financial entities like banks. That they aren't calling for this, and instead want the U.S. government to buy bitcoin, suggests they are motivated by a higher price for bitcoin and their own corporate profits, not actual statecraft.
good thought, but i think mining would just move abroad, it's not a captured audience like banking
ReplyDeleteSome might. But a big chunk of the world has effectively banned mining, including most of Canada and much of the EU. By contrast, most US states remains open to miners. Probably better for miners to accept some light regulation from the U.S. Treasury than jump ship.
DeleteLike anonymous said above, some mining would certainly move abroad. But more importantly, 38% is not enough to censor those transactions. You can censor either at the transaction level or at the block level.
ReplyDeleteTo censor at the transaction level, you just don't include any banned transactions on the blocks you prodece. This is a weak form censorship since even if you control 90% of the mining power, banned transactions will still get into 1 out of every 10 blocks. So you're really just delaying transactions. This is what happened with Tornado Cash transactions in Ethereum. They never stopped being processed, it would just take a bit longer.
To censor at the block level, you don't build on top of any blocks that contain banned transactions. This is strong censorship since the transactions are never processed, but it requires that you control at least 51% of the mining power. And at this point you can imagine that the community would of course react to this and hard fork the chain to try to remove your mining power.
The kind of censorship you are imagining is simply not possible, the US government would be smarter to just buy Bitcoin.
You make some good points but I think you've missed the main thrust of this post, which is that a large U.S. mining nexus provides not only a degree of control over the network itself, but more crucially control over foreign intermediaries, including exchanges.. Start reading from the paragraph beginning with: "But that's only the beginning...."
DeleteIn my example, the Turkish crypto exchange proactively adopts U.S. sanctions rules (i.e. it screens out SDNs) because it doesn't want to risk "causing" the U.S. mining nexus to violate sanctions.
I understand the part about foreign intermediaries. But it's possible to send your transaction directly to specific miners. In Bitcoin it's not common, but it's very common in Ethereum (mainly because of MEV).
DeleteIf the US government starts prosecuting people that use US miners, then people may start using non-US miners.
Ok, but what if the Turkish exchange sends its transactions to a specific non-U.S. miner, and those transactions get added to the blockchain in the next block, but then subsequent confirmations 20 and 30 minutes after that are processed by Riot? The same "causing" logic applies, even though it was in the second and third blocks where the violation occurred rather than the first. Far safer for the Turkish exchange to weed out sanctioned actors before submitting transactions for confirmation.
DeleteThat's stretching the law a looot. At that point the US would be able to declare that every transaction on the Bitcoin network is subject to its authority even if there's a single miner in the US. I'm not a legal expert but it seems a difficult position to maintain.
DeleteAnyway, wouldn't the US gov also have to prohibit US miners from building on top of blocks with banned transactions? Because that would effectively create a fork. You would have US Bitcoin and normal Bitcoin.
and this transfer was processed by a Texas mining farm or pool, say Riot Platform's Rockdale facility
ReplyDeleteYou cannot know for certain which mining pool will achieve to validate a block. Even riot gets the block, how can it remove the transaction from the block? Isnt that completely against the essence of blockchain in general?
You seem to be suggesting that it's not possible for Riot to screen out certain transactions, but that's not the case. In fact, it's been tried before.
DeleteSee: https://www.theblock.co/linked/106865/marathon-ofac-bitcoin-mining-pool-taproot
Good analysis. How would a miner know that a transaction is benefiting a sanctioned entity? Of course some addresses are explicitly known (https://sanctionssearch.ofac.treas.gov/Details.aspx?id=33151), but it's quite easy to create a new on.
ReplyDeleteThe base case is to check against OFAC's list of 340 or so BTC addresses (see chart here: https://jpkoning.blogspot.com/2023/12/the-long-arm-of-ofac-reaches-into.html) and drop any offending transaction, but as you say that's not very effective.
DeleteA more intensive option is to check against this list of 340 addresses and also do some sort of risk-scoring analysis, to catch contiguous addresses and filter out high-risk exchanges.
The most intensive option is to require miners to only accept transactions from whitelisted addresses, which have passed some sort of due diligence process.
As has been pointed out to you several times already, miners don't have access to this information. Here is relevant section in the Stratum v2 protocol overview: https://stratumprotocol.org/docs/#mining-protocol . In Stratum v1 it is even more obvious. In order to do what you want, you would have target the mining pools or template providers, not miners.
DeleteYou do realize that due to this idiotic 'causing' overreach that corrisponding banking relationsships are shifting away from USA. Why? because of its 'sanctions' and overeager AML shit just comes across as operational instability. Like say an electric switch that, from outside observation, just fails randomly/stochastically. Any sane operator just swaps it out or otherwise gets rid of it.
ReplyDeleteTrying to impose this same idioticy on Texas Bitcoin mining firms just causes them to leave USA just like many of them left China.
And here is another thing, you think they need big facilities for their mining equipment. There are intermodal cargo container based setups that can move at very short notice. Very popular with electricity providers that relie on solar or wind power as they are often provider-controled variable load and guranteed buyer of last resort.
And one thing about Bitcoin miner equipment, is that it requires very little bandwidth to what is called Stratus server that co-ordinates them. This means the 'legal nexus' of a mining operation can be anywhere and diffused, and with codes based prepaid 'smart' metering, the electricity provider does not have to even care whoom its selling the power to.
So your idea is badically Dead On Arrival any way you look at it.
"...that corrisponding banking relationsships are shifting away from USA..."
DeleteThat doesn't make any sense to me. To be a correspondent bank and process U.S. dollar transactions on behalf of other banks means having an account at the Federal Reserve, the U.S. central bank. It's not possible for correspondent relationships to "shift away" from the U.S., because ultimately a Fed account is required for correspondence banking to occur, and that means having a foothold in the U.S.
> To be a correspondent bank and process U.S. dollar transactions on behalf of other banks means having an account at the Federal Reserve, the U.S. central bank.
DeleteWhere does that requirement arise?
There are two ways around that requirement.
First is boatloads of physical USD FRNs in various vaults of foreign banks as the backing of any USD denominated accounts at these banks. Hassle for sure, and Federal reserve or the USA mint could revoke the legal tender status of certain kind of FRNs. Basically pull a Modi but that threatens the de jure international reserve status of FRNs abroad and then no one would accept those.
Second is IOU bonds denominated in USD but payable in a basket of other currencies, SDR, gold or what have you. (A bit like how the old Roman currency was used as unit of account and amounts for centuries even nobody involved had ever seen one, and bit like how oil is bought and sold were short lived 'virtual' USDs are used.)
Then take into account the practise of net settlement. I would be surprised that much 'transfer' traffic actually goes through USA system at all.
Seems like a massive stretch to say that an offending transaction included in a block mined by a non US miner still makes the originator 'cause' a sanctions violation for a US miner who produced one of the preceding blocks. In this case, the only one to be in trouble (if at all) would be the US miner itself and if such logic gets actually used to come after them, they would just move away from the US.
ReplyDeletethis isn't just technocratic, sounds like a mephistophelean project, frankly, I hope Bitcoin stays what it is, an uncensorable digital asset, should it change I hope it is slowly abandoned to move on to something else, as it would have betrayed its raison d'etre
ReplyDeletesecondly, I wonder why you trust blindly the American policeman, at some point you should realize that it is a country that has committed crimes like those you often impute to Russia - most probably the civilians massacred in Falluja or Basrah, or more recently in Gaza were not relatives of yours - but believe me, if they were your family, you would still be a little pissed off at those whose 'foreign policy' you want to extend to other jurisdictions..