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A few thoughts on the game theory of tainted bitcoin.

TLDR; taint cannot work over time.

Let's visualize a possible scenario where a jurisdiction, for example the EU, decides to classify certain bitcoin addresses as tainted.

A few expected outcomes:

1. Many entrepreneurs would likely leave the EU in reaction, either because they own bitcoin or because they consider the regulatory move to be a red flag indicating more coming authoritarian measures. If A happens, then a logical B can be expected to follow.

These entrepreneurs won't take their bitcoin *with them* because all bitcoin exists globally without borders and their bitcoin are already waiting for them in the new jurisdiction. Their bitcoin does not move when they move, but their spending is now relocated outside of the backwards jurisdiction.

2. Let's then assume that some entrepreneurs have had their bitcoins classified as tainted by the EU. As they settle in a new jurisduction - which doesn't care about the EU:s taint decisions - these "EU-tainted" coins are soon entering the economy and switching hands. Nobody in a free economy has any reason to care about the dictatorial phantasmas of the EU.

3. After these coins/sats spread in the free market economy, they will eventually end up in contact with the EU again. At that point, the coins are now integrated in the economy and the "EU-taint" will be considered obsolete.

If the EU decides to keep rejecting the "EU-tainted" coins/sats, the EU will lose out on more and more commerce due to self-quarantine. The number of tainted coins will grow over time and the EU will have to eliminate themselves from an in increasing amount of valuable trade.

Over time the taint policy will become so ridiculous and economically harmful for the EU that there won't be any public support to keep the taint regulations.

Besides, as the coins/sats have moved through the free, prosperous and just jurisdictions of the world where property rights are respected, the laggard economies that issued the taint will have little incentive to remain laggards. Or Lagarde's, as they may end up being called.

Don't be a Laggarde!

#Bitcoin #Taint #GameTheory #PropertyRights #Property #Rights #IndividualRights #Individual #FreeMarkets #Free #Markets #Voluntarism #Libertarian

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Discussion

Leo Fernevak 1y ago

He's right, at least on this matter.

The reason I say this with confidence is because the Bitcoin protocol that everyone have invested in is precisely what we have, not what someone wants it to become.

Bitcoin's fundamental function is store of value. Privacy tools are added over the base layer on an opt-in basis.

A vital function of Bitcoin is the game theory level. Bitcoin has a design that allows it to pressure jurisdictions towards liberty-oriented policies *because* it is the best store of value.

If we consider the tradeoffs that Monero makes, we can understand why Monero is not aiming for a store of value. As a result, Monero cannot leverage a pressure against jurisdictions in any comparable way.

Those who want Bitcoin to become more like Monero, while the privacy side benefits are tempting, such a move would undermine Bitcoin's function as store of value and several of its game theory benefits.

On a related subject, I wrote recently about why tainted bitcoin/sats is a losing strategy by the jurisdiction implementing it. If Bitcoin became more Monero-like, then the game theory involved will have different outcomes. The assumptions are based on Bitcoin being a superior store of value and therefore desirable by nation states, which gives it powers to pressure jurisdictions.

Why tainted coins is a losing strategy:

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Leo Fernevak 1y ago

Thoughts on the game theory of tainted Bitcoin, part 2.

In my first note on the subject I described in short why I believe that tainted coins/sats cannot work over time.

A possible response from governments as their taint policies inevitably fail, is to introduce a "taint tax".

One aspect of the game theory of Bitcoin is that governments will want to accumulate as much Bitcoin as possible, it being the best and most secure and neutral store of value.

One aspect of this *value* is that Bitcoin is neutral. Bitcoin transactions cannot be stopped via sanctions or political intrigue. This adds real, practical value to Bitcoin both for individuals and for competing nation states.

Taint tax.

As I alluded to above, a taint tax might be a possible strategy attempted by certain governments.

In practice this would mean that a government, realizing that their AML/KYC taint system is not working, decides to *accept* tainted coins/sats for a fee -- a taint tax.

Let's say that the EU introduces a Bitcoin taint tax at 10% for buying a house. If you can't or don't want to disclose the history of your coins/sats, the EU basically says: fine, we don't want to lose billions of Euro in lost trades every year, so we accept your coins that we have labelled as tainted, provided you pay us this extra fee (tax).

However the game theory doesn't stop here. The proposed taint tax will have to be evaluated in relation to the market response.

The EU might have to lower the taint tax to 5%, 2% or whatever the market participants consider a reasonable theft vs the benefits.

As nations compete to stack Bitcoin, taint taxes will also compete. If another country sets the taint tax to 1%, the EU will have to consider lowering their taint tax.

Many jurisdictions will not care about the EU taint phantasmas at all and their free market policies will naturally impact the rates that the EU sets.

Liberty-oriented jurisdictions will prosper from the increased commerce that follows from a free market without taint regulations and such government overreach.

As I reflected in my first note, I don't see how taint regulations will survive on a competitive global market with sovereign jurisdictions.

At the end of the day, consumers will vote with their feets and sats/wallets. Market participants will have the final word.

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