Introduction

Bitcoin is often touted as a fungible and private asset and digital cash alternative, when in fact it is technically non-fungible. Each bitcoin in circulation has a distinct history attached to it ensuring that 1 BTC is not equal to 1 BTC. While coin histories can be somewhat obfuscated with tools like CoinJoin, the fungibility of Bitcoin remains distinctly lacking. This lack of fungibility imposes an immense burden on those using Bitcoin as a method of exchange (MoE), introduces a permissioned and centralized layer to the network, and destroys the confidence of everyone accepting funds in Bitcoin.

Many Bitcoiners purport that fungibility can be gained through more users mixing, or by peer-pressuring and boycotting exchanges and services that flag or trace Bitcoin transactions. In theory this is possible (suppose in another universe, everyone mixes), but why leave it up to chance?

The Monero community sees fungibility as a basic safety feature. Good tools should include safety features by default, strong enough to withstand both governmental and social attacks. This is far preferable to relying on the good will of governments and regulators, or the peer-pressure of us as users to ensure fungibility of digital cash. Do you really want your coins to be fungible only if everyone in Bitcoin correctly follows a 36h-long privacy guide?

Monero relies on privacy by default, for all users and all transactions, to ensure that 1 XMR is equal to 1 XMR, no matter what. Monero is fungible today, not just in a pipe dream.

The Fungibility Graveyard

This concern isn’t only a fun thought exercise, unfortunately, as users of Bitcoin privacy tools are being harassed today.

Below is a list of sources confirming cases of flagging, denied withdrawals, denied deposits, and censorship by services because of a distinct lack of fungibility within Bitcoin. The list is broken down by the tool or reason for the flagging or censorship.

Current confirmed cases: 33

Wasabi

  • A user’s Binance SGD account is frozen upon attempted withdrawal to Wasabi Wallet for mixing:
    • Twitter Source
  • A user’s Paxful account is frozen upon attempted withdrawal to Wasabi Wallet for mixing:
  • A user’s Bitfinex account is frozen upon attempted withdrawal to Wasabi Wallet for mixing:
  • A user’s Bitstamp account is flagged months/years after withdrawal to Wasabi Wallet for mixing:
  • A user’s BitVavo account is closed upon attempted withdrawal to Wasabi Wallet for mixing:
  • A user’s Paxos account is frozen upon attempted withdrawal to Samourai Wallet for mixing:
  • The Ethereum DAO hacker’s use of Wasabi Wallet leads directly to his ID after simple tracing
  • Wasabi Wallet announces they will start censoring mixing inputs to prevent certain users from mixing their funds
  • A user’s Gemini account is frozen after previous transactions with Wasabi Wallet were discovered upon review of his account:

Samourai

JoinMarket

  • A user’s BitMEX account is flagged months after withdrawal to JoinMarket for mixing:

All CoinJoins

  • Multiple user’s deposits are flagged by BlockFi upon depositing from a CoinJoin tool like Wasabi:
    • Twitter Source
    • Response from BlockFi
  • A user’s loan is closed while under water (causing a loss of 50%) due to the previous owner of the coins using a mixing service or tool:
  • A user’s account is flagged upon mixing coins after withdrawal from Voyager:
    • Twitter Source
  • Paxos official statement on handling of Bitcoin with a history of CoinJoin:
  • A user’s account is frozen due to 6mo-old post-CoinJoin transactions by Bitwala:
    • Twitter Source

Tainted Bitcoin

Compliant Mining and “Virgin” Bitcoin

  • Marathon Digital Holdings Inc. launches a mining pool “that is fully compliant with U.S. regulations, including anti-money laundering (AML) and the Office of Foreign Asset Control’s (OFAC’s) standards”:
  • Blockseer launches compliant Bitcoin mining pool that only mines approved and filtered transactions:
    • “Blocks posted to the Bitcoin blockchain by Blockseer’s pool will only contain filtered transactions using Blockseer and Walletscore’s labeling data, along with verified sources such as the United States OFAC blacklist for crypto.”
    • News Source
  • Bitcoin mined in China or via fossil fuels are not acceptable to institutional investors:
    • “If you don’t want to own China coin—also being called ‘blood coin’, which sounds like blood diamonds—you’re going to prove where your coin is born.”
    • News Source
    • News Source
  • Freshly mined bitcoin fetches a 20% (or “very large”) premium from large buyers, as this is the only bitcoin available without taint or history:
  • Only “virgin” Bitcoin mined by state-sanctioned miners can be used in Iran:

General Fungibility Issues

  • A user’s account is flagged after withdrawing from BlockFi to a peer-to-peer exchange:
  • Luke Dashjr, Bitcoin core developer, blocks gambling sites as “spam” in a Bitcoin implementation:
  • Coinbase proactively traces and blacklists 25,000 addresses connected with Russian users in order to comply with sanctions against Russia
    • Note: The percentage/amount of these addresses that are Bitcoin is not public information.
    • News Source
    • Blog Source

Additional Reading on Fungibility

Something Missing?

If you’ve noticed an instance of fungibility causing issues in the real world with Bitcoin, please feel free to reach out via Signal, Matrix, Threema, or email or click suggest a change to this post on Github.

Credits

Source Image Archive

Below are archived images of the original sources in case of the source itself being deleted or taken down.

Where the source has already been taken down, see the “Source Image” drop-down under the relevant item above.