Security Notes: How to Disrupt Public Protocol Digital Money

Bitcoin rose to prominence because no government was or is minting it, so no government can unmint it. Bitcoin is minted by a public protocol that cannot be a defendant in a lawsuit, so freedom reigns, or so declares the theology of public-protocol money systems.

Indeed, bitcoin is created by the public at large, and is traded by that same public. Its value depends on the public, too, so all that needs to be done to disrupt a public-contract coin is to generate a public reason not to be paid with that coin. Come to think of it, any entity—not necessarily a government—that is a big money trader has the power to generate a disinclination to be paid with a public-contract coin.

Digital coins bear a unique public identity (UPI). This very fact ushers in a dramatic new monetary reality that was not imaginable earlier. A bitcoin is identified by its history, a BitMint coin is identified by its randomized stamp. No two coins share the same UPI.

Enter the notion of “blackballing.” Imagine a criminal who extracts a 20-bitcoin ransom. The victim notifies the police, and as a result the government decides to “blackball” these 20 coins. Accordingly, the government declares it will not accept these coins as payment. Furthermore, any legacy money that paid for a blackballed coin will not be recognized as due payment.

At first glance, it does not look like a big deal. So what if the government refuses to accept a particular bitcoin? The coin still can trade around the world. But the government can go further. It can declare that, in order to do business with the government, a supplier must join the “blackballing campaign.” Soon enough, all merchants that do business with the government will list these 20 coins as unacceptable. Now, an average Joe who expects bitcoin as payment will be reluctant to accept the blackballed coin, since he knows that when he tries to use it for payment, his payee will reject it. In other words, blackballing spreads and eventually drains targeted coins of their value.

It is this unique public identity that enables this practice of blackballing. Legacy electronic money is represented by a number only. If you add $1,000 to an account holding $9,000, you end up with an account holding $10,000, and there is no way to distinguish between the added $1,000 and the prior $9,000 balance. So there is no way to blackball the added $1,000. Alas, coins marked with a UPI, even if mixed in with a larger pool, are still distinguishable and cannot shake off the blackball indicator.

Should Amazon or Walmart blackball a particular coin, traders who may never buy there will also decline this coin as payment because they know they will have a hard time spending it.

This power to blackball coins could motivate big commercial payees to mint their own digital coins and blackball all other coins. The payee may then whiteball its own, self-minted coins and sell them at a premium, making money from the public’s need to own coins accepted at their favorite stores.

Influencers may blackball coins, then charge money for a cause to remove the mark. Blackballing could also facilitate cheat-proof taxation. Wealth-based taxes may be levied on any outstanding public coin, resulting in blackballing any coin on account of unpaid taxes.

Remarkably, blackballing also enables privacy, since anti-money-laundering campaigns can be waged over the suspected coins without bothering with who the owner is.

All this may sound far-fetched, as blackballing isn’t in full force yet. But plans for it exist.

—Gideon Samid gideon@bitmint.com