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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 Very interesting thought exercise and I generally agree with your conclusions. 

 🙏 

 I would suspect this would be attempted, play out and resolve extremely quickly. I suspect significant sellers awaiting better cap gains regulation would either have already relocated or be willing to hold. 
I don't expect tainted coins to be a thing at all as all coins are just too scarce.  

 You can borrow to buy a house and pay it back by selling your sats slowly. There is a big chance your sats pile will buy you more that way and you don't end up triggering any (most?) red flags. 

 Good point. There will be many options open. I am considering bad case scenarios in an attempt to understand a likely market response to regulations.