Experts warn of Bitcoin censorship risk

Members of the crypto community have reported an increased number of censorable transactions from sanction lists and warned that Bitcoin miners could face even greater pressure from authorities in the future.

Unwanted transfers

On November 20, on-chain analyst under the pseudonym 0xB10C published a blog post, in which he notes the discovery of six Bitcoin transactions that were not included in the blocks of three major pools: ViaBTC, F2Pool and Foundry.

All transfers are connected in some way to addresses that OFAC previously placed on its sanctions list. The operations occurred in September and October, and the affiliated wallet was allegedly linked to Chinese drug traffickers.

Another transaction was conducted from the address associated with the Russian sanctioned Suex exchange.

According to 0xB10C, all these transfers were later picked up by other miners and ultimately recorded on the blockchain.

Partner at law firm Orrick Ben Hatten told The Block that US regulators are watching cryptocurrency. While miners are not yet under strict scrutiny, he added that they have grounds to prepare for the worst.

«If miners provide services to people on the sanction list, OFAC may regard this as material support for a person subject to the department’s restrictions, which could prompt action against the service provider itself,» explained the lawyer.

CoinShares’ head of research Christopher Bendixen believes that some miners will still have to comply with regulatory requirements and, as a result, incur financial losses.

Preparing for regulation

As far back as May 2021, Marathon made an attempt to censor transactions by filtering sanctioned addresses.

The creation of a “compliance pool” drew disapproval from many in the community, so the initiative did not last long — until June of that year.

«The industry will need to respond to regulatory requirements if traditional players are to participate in it. […] We fully support the Bitcoin community and its pursuit of full decentralisation and transparency», — proclaimed Marathon CEO Fred Thiel.

Later, the company’s vice president for communications, Charlie Schumacher, admitted that the decision was “extremely unpopular and impractical.”

He said that firms do not want to “filter” transactions, but will have to do so if mandatory regulatory requirements are introduced.

«Everyone in the industry understands — they cannot win a firefight with the U.S. government», — agreed CoinShares’ top executive.

Regulatory pressure on the industry is underscored by authorities’ closer attention to crypto mixers, including the case Tornado Cash, according to the Orrick lawyer.

«FinCEN proposed a special measure that defines all services for mixing digital assets as a primary AML issue. Historically such actions were taken only against a jurisdiction or a financial institution. However now they have been applied to a specific class of transactions», — explained Hatten on the scale of the situation.

Cooperation with authorities by large crypto firms like Tether also signals the industry’s preparation for regulatory intervention, he added. Earlier, the issuer of USDT confirmed its stance toward cooperation with law enforcement in letters to US lawmakers.

Moreover, the community fears potential censorship of transactions of the form BRC-20. After criticism from Bitcoin Core developer Luke Dashjr, who accused Ordinals of “fouling” the blockchain, the protocol’s “inscription” feature were added to the U.S. National Vulnerability Database.

Ocean mining pool, owned by Dash, also stopped processing Bitcoin-related NFT transactions. The platform later revised its policy and left the decision on filtering to validators.

Recall, in December 2023 the MEV-infrastructure provider bloXroute took the decision to reject operations linked to sanctioned wallets on the OFAC list.