Bitcoin token recovery is not a fork

The Bitcoin token recovery process does not require a “fork” of the blockchain, be it soft, hard or sterling silver.

Most of us will remember with some trepidation our first formal dinner, where we were presented with what appeared to be a serious abundance of forks. Confusion reigned until someone helpfully whispered to us that we start from the outside and move inward with each course. Relieved by this knowledge, we regained our sense of decorum and went back to entertaining our dinner companions with witty anecdotes. (Of course we did.)

Similar confusion appears to prevail regarding the role—or lack thereof—of “forks” in the process of token recovery on the Bitcoin blockchain. The recovery issue has been in the spotlight largely due to the efforts of Tulip Trading Limited (TTL) to convince a UK court that blockchain developers owe fiduciary and indemnified duties to blockchain users who have been victims of digital theft.

Earlier this month, the UK Court of Appeal unanimously overturned a High Court decision to dismiss TTL’s case against the blockchain developers, paving the way for a full trial on the issue. The judges’ ruling stated that digital assets are “left to the care of developers,” who “realistically” may have “a duty to act to introduce code so that an owner’s Bitcoin can be transferred to security under the circumstances Tulip alleges.” “

TTL is owned by Dr. Craig Wright, the real-life figure behind Satoshi Nakamoto, the pseudonymous author of the 2008 Bitcoin White Paper. TTL is attempting to recover over £1 billion in digital assets, the private keys of which were stolen in a 2021 hack by the Wrights computer.

Wright’s original Bitcoin protocol contained a notification key function intended to alert Bitcoin miners to freeze tokens stolen from their rightful owner(s). But this feature was permanently disabled by the developer group known as Bitcoin Core, many of whom are among those being called to task in the TTL case before UK courts.

Wright has championed efforts to restore some legal sanity to blockchain asset ownership through the Digital Asset Recovery process. Predictably, this has earned him the usual brickbats from supporters of the BTC token that emerged from the developers’ vivisection of the original Bitcoin protocol (now safely preserved in the form of Bitcoin BSV, aka BSV).

Last October, the Bitcoin Association for BSV launched the Blacklist Manager software tool to allow miners to freeze digital assets on the BSV blockchain – provided a court order or equivalent documentation is secured. Blacklist Manager is a key plan for Digital Asset Recovery, which argues that a blockchain is not an anarchic free-for-all space where property laws do not apply.

There is no doubt that the current system – where victims of theft have to beg exchanges or coin mixers not to allow thieves to convert stolen tokens and cover their trail of digital breadcrumbs – is unsustainable. When the hope of recovering your property depends on insecure exchanges like Binance – a key conduit for criminal darknet marketplaces – abandon all hope, you traders here.

Freeze, remove, reissue

The YouTuber known as Crypto Kid TV! recently discussed Wright’s efforts with Ruadhan O, founder of Seasonal Tokens, an Ethereum/Polygon-based “cyclical cryptocurrency ecosystem that features four tokens: spring, summer, fall, and winter.” The episode in question was titled “Bitcoin expert Ruadhan O on Craig Wright goes to court with $2.5 billion demand.”

Ruadhan believes that the judges in the TTL case have made it clear that it is “unacceptable that cryptocurrency is outside the law”, and therefore it is “very likely that Wright will succeed in getting the judges to understand how to freeze Bitcoins.” But, with no disrespect intended to Ruadhan, his “Bitcoin expert” status becomes a tough one when he describes the process by which TTL can be reunited with its purloined assets.

Referring to the Blacklist Manager, Ruadhan notes that the UK court could order the Bitcoin Core developers to add this tool to the BTC blockchain’s code. Ruadhan claims that the result of this will not be the movement of stolen tokens from one address to another, only the freezing of the stolen tokens at their current address.

But Ruadhan argues that this freeze would require a “soft fork” of the blockchain, which involves wrapping a rule change in a software envelope that essentially tells the blockchain’s nodes to ignore the rule change. It would arguably be less disruptive than a “hard fork”, where disagreement over the implementation of software rules causes one faction to branch off into an entirely separate chain with its own set of rules.

But this is a misrepresentation of (a) what TTL proposes and (b) what is required to achieve that proposal. No fork – hard or soft – is needed. Token recovery simply freezes the stolen assets, and then they are removed and reissued at the tip of the chain, with a full audit trail, so everyone recognizes their provenance.

There have been preliminary discussions about ways to further improve this process, including including country codes in Bitcoin transactions, effectively labeling them with jurisdictional labels. It could allow individual jurisdictions to determine the type of transactions that can be conducted within their borders, but it would also allow for more focused recovery processes based on the circumstances of the person whose assets have been stolen.

If you (legally) build it, they will come

As Wright forever reminds us, code is not law; law is law. Absent this principle, digital assets will forever lurk in the financial shadows, to the primary benefit of fraudsters, ransomware hackers, and other miscreants.

Wright says it is disingenuous to claim that Bitcoin was designed to be outside the law and that transactions cannot be recovered. The use case presented in the white paper focuses exclusively on small random payments, i.e. below 500 USD. Just like cash, reversing transactions requires a level of proof that makes it impractical to use for small and micro-level payments. For this reason, Bitcoin is designed to be irreversible at very small levels.

Higher-level transactions—in the case of cash, those exceeding $10,000—require identity solutions and other allocations that were not included in the original Bitcoin release, such as know-your-customer (KYC) and anti-money laundering (AML) standards. While the white paper stated how identity is firewalled in Bitcoin, it does not mean that identity does not exist. Rather, identity is firewalled by the blockchain, in wallets and other applications outside of the primary Bitcoin protocol.

Johnny Jaswal is the managing director and general counsel of the Toronto-based Jaswal Institute, which provides regulatory, legal, public relations, strategic and related investment banking advisory services. Jaswal also assists with Token Recovery, whose mission Jaswal describes as “bringing the law to digital assets to increase retail, institutional and corporate adoption of blockchain structures and digital assets by promoting trust in these powerful systems.”

Jaswal told CoinGeek that “the proposition that a lack of technological understanding or lost keys could cause someone to lose ownership of assets is not feasible in a functioning and thriving financial system.” Referring to Ruadhan’s comments regarding the TTL case, Jaswal said that despite the work his group has done to raise awareness of the realities of digital asset recovery, “a lot of people still don’t have it right.”

“The most misunderstood component of the market is that, like the legal principles used in the TTL case, the recovery process is about taking existing legal frameworks and applying them to blockchain technology; for example, by establishing legal ownership over an asset and implementing this the ownership by imposing the enforcement of rules via the network, as stated in the Bitcoin White Paper.’Not your keys, not your coins‘ is against the law and prevents the efficient operation of the market, and the work we do at Token Recovery makes that clear.”

See: Digital Asset Recovery on Bitcoin Explained

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