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An ‘OFAC-compliant’ bitcoin miner revives debate about transaction censorship

An ‘OFAC-compliant’ bitcoin miner revives debate about transaction censorship

On May 5, the publicly traded mining firm Marathon created its first “sanctions-compliant” block of Bitcoin transactions after announcing its intention to do just that.

The development renewed the fear that bitcoin’s long-touted censorship resistance — that is, how miners typically take an agnostic viewpoint to which transactions are included in their blocks — would slip due to the actions of network participants like Marathon’s new pool. 

But understanding this controversy means understanding the growing intersection between bitcoin, an open transaction network, and the U.S. Office of Foreign Asset Control, which administers the United States government’s financial sanctions efforts. 

OFAC and Bitcoin

The U.S.-based Marathon announced plans in late March to launch a BTC mining pool in compliance with OFAC. 

In recent years, OFAC has become more and more assertive by adding crypto wallet addresses to its Specially Designated Nationals list as cyber-attacks become more central to national security. Moreover, countries subject to wholesale embargo regimes like North Korea, Iran and Venezuela have flocked to crypto, heightening U.S. suspicion.  

A long-standing grievance has been uncertainty about miners themselves. With Bitcoin’s mining network famously China-heavy for most of its existence, many in U.S. national security and intelligence have presumed that block rewards are going to unsavory parties.

Among a number of entities working to bring mining into the U.S., Marathon is especially active in trying to play ball with authorities. But what does OFAC-compliant mining look like?

Mara Pool’s methods, in practice

The initial announcement was unclear exactly how Mara Pool would determine which transactions it would classify as “clean.” 

A representative for Marathon told The Block when reached:

“MARA OFAC Pool uses DMG’s Walletscore, one of the original chain analytics technologies, to determine which transactions will be accepted into a block-based on information provided by the US Department of the Treasury and Office of Foreign Assets Control, databases of OFAC restricted cryptocurrency addresses, as well as other sources including the Dark Web.”

In other words, DMG Walletscore does not just identify wallet addresses named in OFAC’s lists — of which there are not even 100. The software assesses wallet addresses for past transactions to assign risk scores. 

Put another way: this approach represents a classic form of risk appraisal, one that’s familiar to traditional banking institutions looking to filter potential clients and, more recently, a type of program that compliant crypto exchanges have had to implement. 

Yet for a mining operation, that becomes an issue of checking wallets at velocity. It seems to have severely restricted the block that Marathon mined, both in terms of transactions and monetary reward for the miners. 

Block number 682170 earned MARA OFAC Pool $2,903. It included only 178 transactions. For comparison, the two adjacent blocks earned  $17,478 and $17,528 in miner rewards and processed 1,180 and 1,096 transactions, respectively. 

Controversy?

Beyond simple issues of throughput, extending these types of wallet checks has been extremely contentious among the crypto industry. Many identify measures like MARA Pool as threats to Bitcoin’s promise of censorship-resistant, self-sovereign transactions. 

As a result, the crypto industry was quick to dogpile on MARA Pool and its newly minted block. Some users noted that despite the overabundance of caution, two of the transactions processed belonged to addresses previously associated with darknet market Hydra. 

Developer Giacomo Zucco noted that there had always been a problem that “miners can choose to generate “empty” (ie coinbase-only) blocks, preventing people from transacting onchain,” but that these blocks would require outside subsidization. The ultimate question, he said, was “will the market-demand for uncensored txs be sometimes higher than the budget for censorship?”

Trading for Marathon on Nasdaq has slipped from $36.71 on April 30 to $31.40 today. The firm, has seen its market value balloon over the past year and expects to have a new order of 100,000 Bitmain ASICs operational by the beginning of next year.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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Author: Kollen Post