Bitcoin concept

Stolen Bitcoin: CFOs and corporate treasuries should love ‘freeze and return’

There has been much gnashing of teeth in the BTC community over Dr. Craig Wright’s legal campaign to recover Bitcoins he claims were stolen from him. But why? Without any means to recover billions of dollars worth of assets that can be lost or stolen in an instant, Bitcoin can kiss goodbye any serious prospect of institutional investors or large corporate buy-ins.

Executives, corporate boards, and shareholders alike will not be keen to invest in a digital asset that can’t be recovered once stolen. Sure, these companies probably use rock-solid security. Maybe they’ve even found ways to insure their holdings (at additional high cost). But neither option is a 100% guarantee against loss, and the above parties would want high-level scalps if any such loss occurred.

The majority of enterprises, institutional investors, HNWIs and hedge funds won’t touch BTC or Bitcoin until there are more reliable ways to store it. This, along with regulatory permission issues, has long been a reason for their continued reluctance to buy in.

What should BTC be celebrating, and why?

The same BTC world also celebrated large investments in the asset from tech entrepreneurs Elon Musk and Michael Saylor. Saylor and his company MicroStrategy had invested roughly US$1 billion in BTC by the end of 2020, and Musk’s Tesla announced a $1.5 billion investment in early 2021. As well as signaling more mainstream acceptance, those investments also drove the unit price of BTC to greater highs, reaching over US$57,000 per coin by late February 2021.

BTC’s history is also riddled with hacks and thefts. The largest and most notorious is Mt. Gox’s 650,000 BTC loss in the months/years leading up to February 2014, which has never been recovered. The following year, payment processor BitPay (which presumably had better security) managed to lose 5,000 BTC in an elaborate phishing attack that convinced top executives to “legitimately” authorize payments to the attacker’s wallets.

For the record, BitPay’s BTC was insured, but its insurance provider refused to pay. The scandal was reportedly one of the reasons that led to the ouster of executive chairman Tony Gallippi.

Tesla’s share price dropped 8.6% in the weeks after the company’s BTC investment, which some in the financial press attributed to an Elon Musk tweet suggesting the BTC price was too high. That drop saw Musk’s own net worth fall by US$15.2 billion, and return the title of world’s richest person to Jeff Bezos.

Now, imagine the fallout if a billion dollars in BTC suddenly vanished from Tesla’s holdings—via a hack, phishing attack, mistake, or malfeasance by some party involved in the coin security process. The blockchain contains a record of all transactions, so wouldn’t investors prefer to have a means of redress, rather than watching helplessly as their property was distributed to a series of nameless addresses (as Mt. Gox’s customers did)?

Given the importance of the coin price to BTC holders, you’d think they would celebrate a move that would further secure assets and encourage more corporate investments. Therefore, they should be celebrating Dr. Wright’s legal moves rather than deriding them as an attack.

What’s the alternative?

The only alternative to legally-enforced Bitcoin recovery is the crypto-anarchist “your keys, your coins” myth that has propagated over the years.

Stop talking about regulatory arbitrage. Censorship-resistance, privacy, and tax evasion are bad ideas. We hate that … People with billions of dollars don’t want to invest in crypto networks that support anarchists.

It wasn’t Craig Wright who said that—it was Michael Saylor himself, in an interview with BTC Times last year. While it’s curious that Saylor equates privacy as a “bad idea” up there with tax evasion, it shows he certainly doesn’t see BTC as an asset that allows its users to skirt laws.

Saylor also added: “Integrity is by far the number one deliverable of Bitcoin. Institutional investors need reliability and longevity.”

How much integrity does BTC have as a digital bearer asset that can’t ever be recovered if it disappears? Very little.

How recovery would work

If Alert Key functionality were restored to the Bitcoin SV (BSV), BTC and BCH protocol software, then developers with access to that key could broadcast a message to transaction processors (miners) on their networks, instructing them to freeze certain UTXOs (unspent transaction outputs). This would happen only after a court order that established ownership and loss, and ruled in favor of redress.

Broadcasting the alert itself does not freeze coins/UTXOs. It would then be up to individual node operators to follow the order—or in theory, risk enforcement action against them. They are incentivized to do this by Bitcoin’s economic rules, since enforcement action would destroy their business and the substantial investment they’d made in setting it up.

Dr. Wright outlined this process in a blog post back in October 2019, saying:

The original concept of the alert key in the alert system allowed Bitcoin to have a freezing system. It would allow individual addresses, nodes, and much more to be stopped. Before a case was finalised, miners, as they are now called, or nodes would be able to act on the receipt of a validly issued judicial order. As such, they could freeze assets globally.

The Alert Key functionality is one of the things Dr. Wright is suing to have restored to the BTC, BCH, BCHA and BSV protocols. Rather than howling “how dare he” and vowing to protect developers from such an imposition, BTC fans and corporate investors alike should be cheering him on. Failure to establish a legal ownership precedent, and implement a legitimate loss recovery mechanism in the various protocols, would only lead to tears in the future.

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