Ideals and Reality: Bitcoin's "Wild West" and Legal Challenges

Author: Web3 law, crooked neck three views

In 2008, a person who called himself Satoshi Nakamoto published a paper called "Bitcoin: A Peer-to-Peer Electronic Cash System", proposing a decentralized peer-to-peer electronic cash payment The idea of the system has thus opened the door to the Web3 blockchain industry.

"The Economist" published an article on Bitcoin in 2015 - "The Trust Machine", telling us that the technology behind Bitcoin will change the way the economy works. **It is true that the early days of Bitcoin have been notorious for their illicit uses, but we cannot ignore the extraordinary potential of the blockchain technology behind Bitcoin, and the significance of this technological innovation goes far beyond the cryptocurrency itself. **

This article will start from the Bitcoin white paper to explore the social impact and legal challenges brought by the innovations behind Bitcoin and blockchain technology - decentralization, anonymity, privacy protection - to the real world. Later, let’s discuss how this innovative mechanism has brought us great wealth—the decentralized trust mechanism—how it will be interpreted in the future.

1. A decentralized peer-to-peer electronic cash payment network

Transactions in the real world rely on financial intermediaries as a trusted third party (Trusted Third Party) to endorse. This kind of trust endorsement by a trusted third party often has many defects, such as unnecessary transaction costs, transaction reversibility, centralized evil, etc. problem, the most realistic and tragic lesson is the 2008 financial crisis. So is it possible to invent a new medium of exchange that allows arbitrary parties to transact directly without the need for a trusted third party, just like cash transactions?

This is exactly what the Bitcoin network wants to achieve - a decentralized peer-to-peer electronic cash payment system, which aims to solve the centralized trust problem existing in the current financial system and provide users with a safer, more convenient and lower-cost payment method (a peer-to-peer version of electronic cash () would allow online payments to be sent directly from one party to another without going through a financial institution).

**Second, ** Using blockchain, cryptography, distributed ledger and other technologies to achieve

Blockchain technology guarantees the realization of decentralization. It stamps the transaction information within a certain period of time (Timestamp), and combines them together to form an information block (block), and then links the information blocks to each other. Form a chain and verify each other to form a blockchain.

Since the code under the blockchain is distributed and stored on each node of the network, there is no central server, and the network will verify and maintain transaction information jointly by each node through the consensus mechanism (PoW) according to the principle of the longest chain. At the same time, the network adopts asymmetric encryption technology (public key and private key) to realize the audit and verification of transaction information in the whole network, so that repeated transactions (double spending) are no longer possible.

The public bookkeeping model based on mutual verification of blockchain technology, on the one hand, enables transactions to be recognized without an intermediary, and on the other hand, records all transactions completely and openly. Through cryptographic hash function and digital signature technology, the blockchain guarantees the immutability of data to a certain extent, thus establishing a trust mechanism for the network ledger without the need for a trusted third party.

Three**, **New Governance Incentive Mechanism

In the Bitcoin white paper, a business model based on mining and transaction fees is designed, that is, Bitcoin miners calculate the hash value of the block to obtain Bitcoin rewards and transaction fees at the same time. In the case of decentralization, this model provides economic incentives for the participants of the Bitcoin network, while also ensuring the stable operation of the Bitcoin network.

**An important challenge is how to protect personal privacy while ensuring open ledgers and data transparency. **Therefore, in order to enhance the privacy of on-chain transactions, some privacy protection tools have been developed. For example, privacy coins like Zcash and currency mixers like Tornado Cash use additional technical means to make the interaction and transaction behavior on the chain invisible, thereby providing a higher level of privacy protection.

**Therefore, Web3's privacy (Privacy) should include the above-mentioned identity anonymity and behavioral confidentiality, that is, all user's identity, behavior, activity and other data information are invisible. **

**Privacy in Web3 = anonymity (identity data) + confidentiality (behavioral data). **

• Anonymity means that the identity information of the user is not visible, which means that the transfer party and the payee of the transaction are non-public. However, due to the emergence of on-chain analysis tools, the anonymity of user identity information has become unsustainable. It can be seen that the off-chain identity information of the founder of BAYC has been exposed.
• Confidentiality refers to the invisibility of behavioral information such as user interaction and activities, which means that the content of on-chain interactions such as transaction amounts is non-public. This step can be realized through technologies such as zero-knowledge proof and coin mixer, so that the information such as input, output and amount in the transaction can be protected in privacy.

(Picture from Polkadot Decoded Talk 2022 by Manta Lianchuang)

Although the privacy of Web3 users can be protected through technical means, so users are happy (others can no longer see that I lost money because of the dirt dog), but the supervision is urgent (criminals are madly laundering 7 billion money to fund terrorist countries to buy bombs ).

**Most jurisdictions require crypto trading platforms to comply with know-your-customer (KYC), anti-money laundering (AML) and counter-terrorist financing (CTF) regulations to ensure transaction compliance and prevent illegal activities. **These regulations may require trading platforms to collect and verify user identities, reducing the privacy of transactions. The sanctions imposed by US regulators on the currency mixer Tornado Cash just illustrates the conflict between Web3 privacy protection and security.

Fourth, Tornado Cash is used in **** illegal activities on the Internet

Tornado Cash is a well-known currency mixing application on Ethereum, which aims to provide users with privacy protection of transaction behavior. It achieves private and anonymous transactions by obfuscating the source, destination and counterparty of cryptocurrency transactions. Tornado Cash accepts transactions of different types of tokens (user deposits), and through smart contracts and innovative applications of zero-knowledge proof technology, various transactions are mixed together, thereby cutting off the public link between the deposit address and the withdrawal address. Transfer to the counterparty (withdrawal by the user) to achieve the privacy of the transaction behavior, and the user no longer has to worry about his transaction being monitored on the chain.

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Therefore, when talking about personal data sovereignty, we are not only talking about the possibility of a technological realization, but also talking about expectations and challenges for the construction of a future social trust system. Looking forward to the future, in these worlds driven by personal data sovereignty, independent individuals can maintain their own free will and form a new trust system to challenge the narratives of capital religion and the mechanical universe, and can also criticize and break the existing solidified trust system .

The decentralized trust mechanism is such a powerful tool and concept that can promote people to form new consensus groups, and then form a future world of peace, fairness, connection and mutual understanding.

5. Written at the end

The cypherpunks went from believing that the Internet was the greatest tool of liberation to realizing that the Internet had transformed into an engine of totalitarianism never seen before. The former digital utopia has become a digital prison, so the cypherpunks have to create a path to utopia-Bitcoin and blockchain technology. So there is what Assange wrote in "Cypherpunk" "The universe believes in encryption!", "Cryptography is the ultimate form of non-violent direct action."

Although Bitcoin and blockchain technology can liberate personal data sovereignty from the digital cage of centralized institutions, the government's supervision of encrypted assets is still a "Sword of Damocles" hanging overhead. Gary Gensler once said that now is the "Wild West" period of the encrypted world, but we don't need to ignore the pioneering spirit brought to that era by the "Westward Movement" and the cowboys just because there are many outlaws in the west. Embark on the land of autonomy, adventure and innovation. Just like the Bitcoin that appeared in 2008, it is bringing various changes to the world.

The concept of blockchains, distributed ledgers, may not sound so revolutionary or appealing, but so are double-accounting and joint-stock companies. However, like these great innovations, blockchain, a seemingly mundane technology, may improve processes and has the potential to change the way people trust and cooperate with each other.

Bitcoin believers are fascinated by this libertarian ideal - a pure electronic cash beyond any central bank. But the real innovation is not e-cash itself, but the trust machine that creates them, and the many more changes it can bring to society.