## Bitcoin Reserve: How govs will steal from you to build the reserves?

The evolving landscape of Bitcoin is increasingly influenced by state-level tracking and regulatory frameworks. As governments develop systems to monitor and control Bitcoin transactions, the implications for users and the market are profound.

### The Trackability of Bitcoin at State Level

Bitcoin operates on a public ledger, making it **pseudonymous**. While individual users can maintain privacy through various techniques, state-level entities can effectively track transactions.

- **Chain Analytics**: Firms and government agencies can analyze transaction flows and link them to real-world identities, especially when users interact with regulated services.

- **Revelio Insights**: The Revelio paper illustrates how network-level observations on ligthning network can reveal custodial holdings and flows, enabling state-level attribution.

### The Custodial vs. Non-Custodial Wallet System

A new regulatory framework is emerging that distinguishes between custodial and non-custodial wallets:

- **KYC/AML Compliance**: Regulators will require that wallets and custodians interoperate only through channels that enforce Know Your Customer (KYC) and Anti-Money Laundering (AML) rules.

- **Isolation of Non-Compliant Wallets**: Wallets that do not comply will be unable to transact with regulated entities, effectively isolating them from the broader financial ecosystem.

### The Mechanics of Blocking and Seizing Funds

States are developing mechanisms to control Bitcoin transactions, which could lead to the seizure of funds:

- **Transaction Failures**: When a user attempts to make a purchase, if the transaction fails compliance checks (e.g., BIS), the funds are blocked.

- **Government-Controlled Reserves**: Blocked funds will be redirected to a government-controlled Bitcoin reserve, effectively allowing states to seize assets under the guise of regulatory compliance.

### Market Implications for Users

The implications of these developments for users are significant:

- **Reduced Autonomy**: Users relying on regulated exchanges and custodial wallets will find their assets increasingly linkable and subject to seizure.

- **Increased Friction**: The need to comply with KYC/AML regulations will create barriers for users, limiting their ability to transact freely.

### Last but not least

The combination of state-level tracking and a bifurcated wallet system creates a plausible pathway for governments to seize Bitcoin. As compliance becomes a requirement for interoperability, users must navigate a landscape where their assets are at risk of being redirected to government reserves. This shift fundamentally alters the original vision of Bitcoin as a decentralized currency, raising critical questions about user autonomy and financial freedom.

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