Censorship resistance in cryptocurrency

What exactly is censorship resistance?

Before discussing censorship resistance, we need to know what censorship means financially. So, financial censorship is when someone prevents you from doing something with your money - such as spending it on something, cancelling a transaction you make with someone else, or freezing your cash. Governments have always been the main censors, but banks, credit card companies and Web2 platforms are increasingly likely to block financial activities. Censorship resistance is the ability to execute financial transactions regardless of what other organisations desire to happen. The three pillars of resistance to crypto censorship are:

·      freedom to send and receive assets

·      freedom from having your assets taken away or frozen by a third party

·      transactions that cannot be changed after they have happened

Gold is hard to censor in traditional finance whilst almost all government-issued fiat currency is heavily censored. Cash is harder to censor but only makes up a small part of fiat; for example, the amount of cash US dollars is about 10% of the total amount of US dollars in circulation - which does not even include the eurodollar market. And talking of euros, for French and Spanish residents it is illegal to use cash when spending more than €1,000. 

Levels of resistance to censorship

There are different levels of resistance to censorship and some assets are more resistant than others.

Operation Choke Point, a 2013–2017 US Department of Justice operation, pressured banks to withhold service to "morally corrupt" lawful enterprises. More recently, the Canadian government ordered banks and payment processors to block Canadians from donating to politically unfavourable parties in 2021. The Canadian government froze truckers’ bank accounts, acting without proof or legal directions. Paypal's 2022 policy to charge users $2,500 for propagating “misinformation” grabbed international headlines. Paypal publicly rescinded the policy. This has included $2,500 fines for undefined “promotion of hatred, violence, racism or other types of intolerance that is discriminatory” since September 2021.

Why fight censorship?

Financial censorship resistance may thwart powerful public and private organisations. Censorship-resistant financial instruments make it more challenging for governments to take away economic liberties. They are offering clients viable alternative checks for financial institutions and enterprises.

Examples of censorship resistance

·      Capital control

Capital control is financial repression where governments restrict people's capacity to invest in foreign assets such as dollars, gold or shares. People must hold regime-approved financial products. In high-inflation countries, capital restrictions strengthen the native currency. Several countries purposefully inflate their national currencies while retaining capital controls. Capital controls transfer wealth from residents to the state in high-inflation environments by restricting them from investing in foreign assets.

Cryptocurrencies' censorship resistance lets people evade capital control’s worst impacts. Capital restrictions are harder to implement if enough people in a country can access capital control-resistant assets.

·      Bankruptcies

Bankruptcy occurs when a significant number of depositors abruptly take their money, whereby emptying the bank of liquid currency and leaving all other depositors unable to withdraw. Despite not being banks, centralised cryptocurrency exchanges can experience bank type runs as has been seen with Celsius, Voyager, FTX and Blockfi, which all collapsed as investors lost their confidence and asked for their assets back in 2022. These exchanges halted withdrawals because they lacked assets to meet their clients’ demands. Crypto exchanges typically afford their clients no insurance unlike traditional platforms that hold stocks, bonds, cash, ETFs and mutual funds which are covered by the Securities Investor Protection Corp (SIPC).  In Europe, the equivalent of SIPC investors are protected up to €20,000 and, in the UK, investors are covered by the Financial Services Compensation Scheme for up to £85,000 of their assets. The lack of insurance for crypto investors is currently as a result of crypto assets not being regulated.

Number of wallets that hold one Bitcoin or more

Source: Glassnode

Bank type runs cannot affect self-custodied cryptocurrencies since you are the bank and you hold your currencies. This, in part, helps to explain why there has been a rise in the number of wallets that hold more than one Bitcoin as investors have opted to hold their one Bitcoin and not rely on exchanges. Unlike a typical bank or controlled Bitcoin exchange, you hold your money like cash in your pocket.

·      Free speech

The Human Rights Fund states 54% of the world lives under an authoritarian state, and authoritarian regimes stifle resistance by limiting free speech. Money is needed to combat totalitarianism, hence governments use it to clamp down on opposition parties and dissidents which will often have their assets and bank accounts blocked. Dissidents use cryptocurrencies to combat tyranny - for example, the over $2 million in Bitcoin raised in 2020 to oppose Belarusian despot, Alexander Lukashenko. Hence, censorship-resistant money may counter authoritarianism.

·      Sanctions

Economic sanctions pressure governments to follow international law. Sanctions are valuable tools, but they may have terrible effects on individuals. Cryptocurrencies potentially allow sanctioned nations to receive remittances from friends and family from oversea.

·      Crypto-censorship resistance

Blockchain architecture resists censorship but different blockchains have different speeds and costs to execute a transaction. Typically, faster, cheaper blockchains are less censorship resistant. Bitcoin is the most censorship-resistant crypto asset and network, however, as Michael Gronager, CEO Chainalysis, has emphasised: “Crypto is far more transparent than traditional finance, and it’s actually really easy to investigate crime, to do compliance in crypto. We follow the funds.”. And the publication Pymnts.com has pointed out: “As the number of companies accepting crypto payments grows, and the number of exchanges and businesses that collect identifying information about their customers grows, user privacy will decrease exponentially”.

Resistance to censorship is important in many countries where governments have strict rules and laws. As long as these rules limit how people can save or spend their money, true financial freedom will never be possible. So, censorship resistance is beneficial for anyone who cannot store money or make transactions without interference from the government or a third party. The challenge is that, while some wish for less censorship others want more. The size of a jurisdiction’s shadow economy and the fact that citizens are not paying the taxes they ought to be are often cited as reasons for more censorship.