Stack or piles of Bitcoin in the court. Bitcoin taxation and legal issues concept.

Digital assets are subject to property laws

This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

Can a court of law order bitcoin to be moved from one address to another without having the private key of the first address?

If this question was asked with regard to a conventional property, the answer is clearly yes, not even worth a debate.

When it comes to a digital asset such as bitcoin, it is a subject of sharp controversy.

Dr. Craig S. Wright, the inventor of Bitcoin, says yes. But many others who stand under the banner of “Not Your Keys, Not Your Coins” adamantly say no.

This is not an easy question. It invokes heated debates. Too often people get utterly upset with what Dr. Wright says because they only look from their own narrow viewpoint. Their view often leads to a spiteful conclusion that Dr. Wright does not even understand the basic encryption and cryptography. But they feel that way only because they are not aware that Dr. Wright is thinking at a different level. And the fact that Dr. Wright, being autistic (Asperger’s syndrome), tends to lack sufficient sympathy of how others think may make it even more difficult.

If you have illicit funds on any Blockchain, whether from drugs, people smuggling or mere tax evasion…

Expect them to be taken… without keys.

You are about to learn you were lied to. Bitcoin (any Blockchain) can be traced, frozen and recovered. Your keys are not your bitcoin. Your keys open the equivalent of a safe deposit box. The tokens are inside.

With a court order, money seized order etc, that virtual safe can be opened. There is no way to stop this, other than honesty. Pay the tax, report, don’t do crime.

This is anywhere, your keys are NOT your bitcoin, your property and ownership rights are.

Dr. Craig S. Wright, Linkedin post (an update: LinkedIn has since censored Dr. Wright and blocked his account)

In the comments on Dr. Wright’s post on LinkedIn. There was much confusion, typical in the Bitcoin context, arising from the fact that Dr. Wright’s opponents failed to comprehend the level of his thinking.

What hashing?

One confusion comes from the fact that people refer to ‘hashing’ in entirely different contexts. While Dr. Wright referred to the hashing competition that mining nodes perform to win a block, his opponents referred to ‘hashing of a public key’ that happens at the user level in regular transactions. These are entirely two different contexts but are mixed together in debates. Dr. Wright said, “hashing is only a process of creating a partial collision.” This of course is exactly what the miner hashing competition is. But others were outraged by this statement, because they clearly were thinking about hashing on the user wallet side (see more below). The two have nothing to do with each other whatsoever.

But hashing is only a side point. The real misunderstanding is about security.

What security?

There is a view about hashing/address/keys being a security measure from an end user’s point of view. From that angle, the bitcoin address being a hash of the public key of a public-private keypair, secured with locking and unlocking scripts, is indeed a security feature (that is, it prevents other users from spending bitcoin in the address).

The above is how some people superficially perceive a cryptography-related security of Bitcoin. In fact, that’s all that many perceive what the bitcoin security is and where it come from. It is even the reason why the entire industry got the name of ‘crypto’. For people who have this standpoint, it may seem outrageous for Dr. Wright to claim that hash has nothing to do with Bitcoin security.

But Bitcoin security is a systemic feature of a network, especially that of nodes, rather than that of an individual address and transaction.

The Rule of Law

Importantly, Bitcoin security lies in its consensus, and law is part of the consensus.

People seem to confuse the enforcement of property laws with the power of the central bank, and further with general government surveillance. These are entirely different things. One can be (or not) a strong critic of the power of the central bank and the monetary system based on it, but be a supporter of the rule of law. Likewise, one can be a strong opponent to government surveillance, but be a supporter of the rule of law.

It may be necessary to start with a general statement of the facts that are often not well understood or are just ignored:

The Bitcoin security is based on the fact that the mining nodes follow the consensus. The Bitcoin consensus normally covers the scripts that are placed in the transactions by users. The mining nodes enforce locking and unlocking scripts, and the scripts effectuate security when the mining nodes enforce the scripts.

But there is an exception. The law is an overarching part of the Bitcoin consensus. When the particular script is illegal, the law may mandate that the script be overwritten or bypassed. In this exceptional situation, the miners are supposed to follow the law not the particular script. This is not an exception to the consensus but a part of the consensus that covers an exceptional situation.

The law, especially the law with respect to the property rights, is implicitly part of that Bitcoin consensus, unless people are openly building an anarchic system. See Bitcoin and property rights.

Now, in the context of Bitcoin, the above commonsensical view is even controversial. Worse, the anarchy-leaning school of thoughts rejects this commonsensical view with strong spite.

The matter is no longer a mere technical disagreement, but a deep chasm in ideologies and values.

The simple question for everyone to answer is: are you anarchist or not? If yes, admit it openly and publicly support a system that is law-resisting. You may be wrong, but at least honest.

But if not, ask yourself the next question: what is the alternative?

There is no alternative to the rule of law. The truth is, unless you want an anarchic system, the rule of law not only must be able to reach Bitcoin, but in fact must be the final authority. The prerogative of the law is the essence of a legitimate government.

The purpose of developing a technological and economic system like Bitcoin is not to separate from the law nor to resist it, but to minimize the need for intervention of the law.

Bitcoin as invented by Satoshi shows great promise in doing just that.

The real Bitcoin was created to (1) support stronger property rights under the framework of rule of law with transparent time-stamped records; and (2) increase productivity with a reliable system that has unbounded scalability and at extremely low costs.

Only Bitcoin Satoshi Vision (BSV) is. BTC is the opposite.

Therefore, the next question is, can Bitcoin follow a court order without breaking its security?

Answer is yes. See further below.

Miners can amend the Bitcoin database

With a court order, the mining nodes are supposed to follow the broader consensus, and when they do, a regular locking script is not an obstacle at all.

If permitted or ordered, miners can amend the bitcoin database, including assigning the bitcoin in one address to another address. Technically this is easy, for miners are subject to locking script only through consensus, not through a technical barrier (such as a cryptographical encryption as many mistakenly suppose).

In other words, the only reason for a miner not to bypass a locking script is because such an act would not be recognized by the other miners due to the consensus. If miners agreed to the change, the change can be easily made.

Many people mistakenly think that, for a mining node to follow a court order, it would have to break ECDSA using brutal force, a barrier that is a practically impossible to breach.

But no such barrier exists in Bitcoin. The fact is that a mining node can just assign the bitcoin in one address to another, bypassing the locking script. It is as simple as making an amendment to a database entry.

There is no technical barrier for a mining node to do this, especially if the process is coordinated through core developers who can release a node software update and even prompt its adoption. The only reason that the miners wouldn’t do this at will in normal circumstances absent of a court order is because doing so would be a violation of the consensus, and other miners are not going to accept it.

That is, the only thing that bars the mining nodes from doing that is the consensus, but a court order removes the bar.

It won’t be easy in practice

The real question is, will a court issue such an order, and if yes, under what circumstance and what conditions?

Also, after the court order is issued, if the miners refuse to comply, how resolute and resourceful will be the court to enforce the order?

These are questions that cannot be answered simply by logic.

Sure, a mining node may choose not to obey the court order. In fact, that’s what the BTC supporters assert the BTC miners will do. That assertion will have to be tested in reality one day. A direct clash between a court and miners would cause some interesting power struggle to observe. History tells us that a US court, if it has issued such a court order, and if it is firmly resolved to enforce the order (both are big if’s), is likely to prevail, even with foreign companies. This is not only because the coercive power of the U.S. through the global banking system and the Internet domains is very high, but also because most countries are likely to collaborate with the U.S. as long as the court order is based on an internationally recognized legitimate decision.

In that scenario, the myth of “no court can enforce millions of people to change their data” will be exposed. It doesn’t matter how many PCs store the blockchain. If they do not have appreciable hashing power, they simply don’t count as a voice at all. It would only take the several top mining nodes complying with the court order to make the change and move forward with an intact chain. No block reorganization is even needed.

If the other miners disagree and refuse to follow, a hard fork will be formed. As a practical matter, upon the occurrence of a fork, the exchanges will need to decide which chain retains the original ticker. From a legal point of view, however, it is clear that the exchanges must give the original ticker to the chain that has followed the court order.

But it won’t be easy in practice. A very high level of reluctance by the core developers, miners and exchanges is likely, and it will require a very high level of persuasion by the court to overcome.

The reality will show that it is not a mere matter of abstract legality, but a matter of practicality based on economics. While it is hard to imagine a case with assets worth just $1,000, it would be more conceivable with a case that involves assets worth $1 billion or more. Soon all this will be tested in a real case.

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