Deconstructing Block Censorship

Block censorship, also known as blockchain censorship or blockchain-resistant censorship, refers to the ability of certain technologies, particularly blockchain-based systems, to resist or prevent censorship attempts. Traditional internet infrastructure and centralized platforms can be vulnerable to censorship, as they rely on centralized control and can be subject to government intervention or manipulation.

Blockchain technology, on the other hand, offers a decentralized and distributed approach to information storage and transaction validation. By design, blockchains are resistant to censorship because they do not rely on a central authority for control or verification. Here are a few ways in which block censorship can be achieved:

1. Decentralization: Blockchains operate in a decentralized manner, with no central authority or single point of failure. The absence of a central governing entity makes it difficult for any one entity to censor or manipulate the data stored on the blockchain.
2. Immutability: Once information is recorded on a blockchain, it becomes extremely difficult to alter or remove. The data stored in each block is cryptographically linked to the previous block, forming an unbroken chain of transactions. This immutability prevents tampering or censorship of historical records.
3. Consensus Mechanisms: Blockchain networks utilize consensus mechanisms to validate and agree upon the state of the blockchain. Proof-of-Work (PoW) and Proof-of-Stake (PoS) are common consensus algorithms. These mechanisms require participants (nodes) to contribute computational resources or stake their cryptocurrency holdings, respectively, to participate in block creation and transaction validation. This distributed consensus makes it challenging for any individual or group to control or manipulate the blockchain.
4. Peer-to-Peer Communication: Blockchain networks often rely on peer-to-peer communication protocols, where nodes communicate directly with one another without intermediaries. This direct communication reduces the reliance on centralized servers or infrastructure, making it harder to censor or disrupt network activity.

By leveraging these properties, blockchain technology has the potential to provide a censorship-resistant environment for various applications, such as decentralized finance (DeFi), decentralized social media, and decentralized file storage, among others. However, it’s important to note that while blockchains can resist censorship at the protocol level, the user interfaces, applications, and gateways built on top of them can still be subject to censorship if they rely on centralized components or external factors.

Bitcoin & Block Censorship

Bitcoin, as a decentralized blockchain network, is also designed to resist block censorship. In the Bitcoin network, transactions are broadcasted to a distributed network of nodes, and miners compete to solve complex mathematical puzzles to validate transactions and add them to the blockchain. The consensus mechanism in Bitcoin is based on Proof-of-Work (PoW), where miners must invest computational resources to secure the network and earn the right to add blocks.

The decentralized nature of the Bitcoin network means that no single entity or group has the power to control or manipulate transactions. Transactions are propagated and validated by multiple nodes in the network, and achieving consensus among a majority of nodes is necessary to confirm and include transactions in blocks. Furthermore, once transactions are included in a block and added to the Bitcoin blockchain, they become part of a permanent and immutable record. The cryptographic linking of blocks ensures that altering or censoring previously recorded transactions would require an impractical amount of computational power and would be easily detectable by other nodes in the network.

However, miners in the Bitcoin network have some degree of control over which transactions they include in the blocks they mine, which gives them the ability to exercise transaction censorship. Miners have the discretion to choose which transactions to include in the blocks they mine. They may prioritize transactions with higher transaction fees or give preference to transactions from specific users or entities. Or, some Bitcoin miners, such as Marathon, have refused transactions arising from OFAC-sanctioned individuals or nations. By intentionally excluding certain transactions from the blocks they mine, miners can delay or prevent those transactions from being confirmed and added to the blockchain.

Regulatory Issues

The decentralized and distributed nature of blockchains can make it challenging for governments to enforce censorship effectively. Blockchain networks can operate across borders, and participants can remain anonymous or pseudonymous, making it difficult to identify and target specific individuals or entities. Nevertheless, while the laws and practicality of enforcing them are a subject of debate, there are specific areas worth noting.

Anti-Money Laundering

Crypto miners typically do not fall under the same regulatory requirements as entities such as cryptocurrency exchanges or wallet providers when it comes to Anti-Money Laundering (AML) regulations. This is because miners are primarily involved in the process of validating and adding new blocks to the blockchain, rather than directly facilitating transactions or providing custodial services. In the U.S., for example, crypto miners are generally not required to register with FinCEN as a Money Service Business — which would trigger AML & KYC requirements under the Bank Secrecy Act.

OFAC & Sanctions Compliance

OFAC regulations primarily apply to entities such as cryptocurrency exchanges, wallet providers, and other intermediaries within the cryptocurrency ecosystem. These entities are expected to implement robust compliance measures to ensure they do not engage in transactions with individuals or entities that are subject to OFAC sanctions. While crypto miners are not required to register as Money Service Businesses, miners — like practically every commercial enterprise in the U.S., are subject to sanctions imposed by various countries or international bodies. These sanctions can restrict trade, financial transactions, or business relationships with individuals, entities, or countries designated under the Specially Designated Nationals list. Miners must comply with the applicable sanctions regulations of their own jurisdiction and any jurisdictions in which they operate.

Freedom of Speech Concerns

While hotly debated, the application of guarantees of freedom and speech and expression are largely an ethical, not a legal issue. When it comes to the relationship between block censorship and First Amendment rights, it is important to note that the First Amendment typically applies to government actions rather than actions by private entities or individuals. The First Amendment generally protects individuals’ rights to express their opinions, share information, and engage in other forms of speech without government interference or censorship.

In the context of blockchains, the decentralized and resistant nature of the technology aligns with the principles of free speech and expression, as it limits the ability of governments or centralized authorities to censor or control the information stored on the blockchain. Many crypto experts believe that this enhanced freedom to be part of the “ethos” of cryptocurrency and have condemned block censorship.

Enforcement Actions

To date, my research has indicated that there have not been any regulatory enforcement actions that specifically address the failure of a crypto miner to engage in block censorship

Conclusion

At present, the issue of block censorship is primarily that of an ethical nature versus a legal obligation. As the increasingly gray landscape for crypto regulation of any nature continues to develop, it seems likely that — at some point, block censorship may become a focus of enforcement.

About Adam Tracy

Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.

Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor — both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.

In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.

Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, CoinDesk, and Bitcoin Magazine.

Find Adam: https://linktr.ee/adamtracy

Originally published at https://adamtracy.io on May 15, 2023.