Which governments own Bitcoin and how much

Chains for bitcoin

How governments regulate cryptocurrencies

Decentralized, independent, grassroots democracy and supposedly unregulated: Bitcoin is the epitome of free trade, against which neither banks nor governments can do anything. With the new EU money laundering directive and the classification of Initial Coin Offers as shares, the governments are still able to restrict trading in Bitcoins.

The properties of Bitcoin sound like utopia when you compare the cryptocurrency with legal tender: it should be decentralized, independent of governments and institutions. No government should be able to control it or impose regulations on it and no less than the world public should act as a supervisory body.

Nevertheless, governments around the world are trying to tame crypto currencies: In the EU, Bitcoin addresses are threatened with mandatory registration. Bitcoin exchanges in Germany require a permit from BaFin, otherwise there is a risk of many years in prison. In Venezuela, miners have to register with the state and China wants to ban mining entirely. Governments want to enforce the same or even stricter rules for what is actually uncontrollable as for money transactions.

Bitcoin gets by without a supervisory body or a trustworthy institution to which regulations could be made. The central element of the cryptocurrency is the blockchain. It enables everyone to convince themselves that everything is going well - because the blockchain logs all transactions for public viewing and for all time.

The individual transactions can also be checked by anyone with little effort. All you have to know is that Bitcoin addresses - similar to an account number - are the hash value of the public key of a public / private key pair. A transaction therefore not only contains the sender and destination address (more precisely: the previous receiving address and the new receiving address), but also the public key of the sender address. In addition, the sender must sign the transaction with the associated private key.

By hashing the public key contained in the transaction data, it is possible to simultaneously check whether the key matches the specified sender address, and by means of the key itself, it is also possible to check whether the signature was correct with the associated private key. With Bitcoin, a transaction is therefore self-authenticating.

Hash function as a backup

But what prevents someone from rewriting history by removing or changing a transaction from the blockchain? Essentially the hash algorithm SHA256, which, when applied twice, delivers the respective hash value of a block.

A hash value is somewhat similar to a checksum: just as the checksum of a long number can be easily calculated, but only cumbersome to find a suitable number from a checksum, the hash value of a data record can easily be calculated with a hash function - but the reverse is true No method known yet how one could calculate a suitable data record from the hash value without trying all possible options (brute force attack). In addition, the smallest changes to the data set have serious, unpredictable effects on the hash value.

The crux of the matter is that, in addition to the transactions, a new block of the blockchain also contains the hash value of the previous block and a number freely chosen by the miner. The miner now determines the hash value from this data set. He compares the result with the specification from the blockchain, the so-called difficulty: It is automatically adjusted so that the specification is so difficult to meet that all mining farms available worldwide only find a solution after about ten minutes.

If the hash value is less than the difficulty, the miner has put together a valid block and can publish the overall result - the hash value of the previous block, the transactions, the number he has chosen and the hash value of the whole.

If the hash value of the data set does not match the specification, the miner changes the self-selected number and thus the hash value of the entire data set until he receives a suitable result - or until someone else has identified and published a valid block.

Link by link

If someone were to subsequently remove a transaction from a block, for example because they want to undo the ransom payment to a ransomware extortionist, this changes the hash value of this block. However, this is immediately noticeable, because the original hash value of the block is contained in the following block. So you would not only have to change the block with the ransom payment, but also the following block in order to enter the new hash value of the predecessor - which also changes the hash value of the successor, which is why you would also have to change its successor and so on.

Worse still: the hash values ​​of the modified blocks would have to meet the difficulty that applies to them in order not to attract attention. Since you hardly have as much computing power as all the Bitcoin miners in the world combined, it takes much longer than ten minutes to forge an old block and turn to the successor - and in the meantime the rest of the world has changed the blockchain further blocks extended, which one would also have to forge. So you would have to control more than half of all Bitcoin miners to catch up and have any chance of manipulating the blockchain.

In fact, authorities have no way of securing extortion or drug money, for example. But they are not completely powerless: Whenever Bitcoins are to be exchanged for a real currency, they can put the crypto currency in place.

Trade barriers

One basis for such trade barriers is the classification of cryptocurrencies as “virtual currencies” by the European Banking Authority (EBA) in 2014. This means that Bitcoin and all other cryptocurrencies are non-governmental substitute currencies with a limited amount of money.

The German financial supervisory authority BaFin has stipulated for its sphere of influence that, for example, the payment of services and goods with Bitcoin is generally permitted. Since in fact only bitcoins are transferred from an address of the buyer to an address of the seller, it would be impossible for BaFin to do anything about it anyway. BaFin has also allowed mining in principle.

However, anyone who wants to trade in virtual currencies commercially, i.e. offer the exchange of bitcoins for other currencies or currencies for bitcoins, provides financial services with it. These are already subject to authorization and providers must comply with far-reaching requirements for customer identification, money laundering and terrorist financing. Anyone who does not receive permission from BaFin has to shut down - like Crypto.exchange from Berlin, which BaFin banned business operations at the end of January.

As soon as the EU money laundering directive passed last December is implemented in national law, there is also a risk of mandatory registration for all Bitcoin addresses - because anonymous money transfers are to be abolished. In addition, financial service providers must then make all customer information and transfers available to the Financial Intelligence Unit (FIU) for retrieval.

Together with the transfer data from the blockchain, authorities could then monitor large parts of the crypto payment traffic. This particularly affects online wallets, in which customers manage their crypto currencies via the web browser: If both transaction participants use such an online wallet, the authorities can easily determine the identity of both business partners.

It can be even more drastic: In the run-up to the introduction of the crypto currency Petro, the Venezuelan government issued a registration requirement for all miners in the country. It would now be easy to oblige miners by law to exclusively mine Petros in the future. If the government controls the miners, it can also influence which transactions the miners process - and could prevent undesirable payments, such as panic selling in the event of a price slide, by decree. The transactions would simply not be carried out and the state could keep the foreign currency it had previously collected.

Strict conditions for ICOs

Efforts are also underway in the USA to curb cryptocurrencies. In the Senate hearing at the beginning of February, however, it was primarily about Initial Coin Offerings (ICO). A central institution, such as a company, sells units of a new cryptocurrency to investors. The chairman of the Commission for Options and Futures Trading (CFTC), J. Christopher Giancalor, found the analogy of a share issue or corporate bond very obvious and announced regulatory measures so that companies can no longer raise capital bypassing the stock corporation laws.

BaFin came to a similar view in its letter of 20 February: Accordingly, it wants to assess in individual cases whether ICOs are company shares, securities or an investment, and has generally made ICOs subject to approval. This means that anyone who wants to issue new crypto currencies in Germany via ICO in the future must apply to BaFin for clarification. If you don't do that, you face up to five years imprisonment.

By restricting the free convertibility of Bitcoin and real currencies, the BaFin and other authorities have a major influence on the actually unregulated cryptocurrencies: Those who want to buy or sell Bitcoins can hardly avoid identification today. If, for example, the authorities were to introduce a license requirement for the use of cryptocurrencies for exchange transactions (i.e. purchases) in the future, the only option would be to swap Bitcoins for other Bitcoins in order to be spared the regulation. So the arm of the law goes much further than Bitcoin advocates would like. ([email protected])