Tainted Coin (Day 611) [IH stopped updating. Please click history to see the new posts]

Bitcoin uses a design called "unspent transaction out", or simply UTXO, to hold any value.

In cryptocurrencies such as Bitcoin, an unspent transaction output is an abstraction of electronic money. Each UTXO is analogous to a coin, and holds a certain amount of value in its respective currency. --Wikipedia

OK, so what does that all mean?

If Alice has 1 bitcoin and wants to send 0.2 bitcoin to Bob, the way it actually happens on-chain is Alice first gives away her entire 1 bitcoin in the transaction, then 0.2 bitcoin is assigned to a new UTXO and becomes Bob's, and the "unspent" 0.8 bitcoin will become Alice's.

To keep things simple, I'm not going into the details. But this UTXO design avoids double-spending, and it allows the blockchain to track the entire history of a bitcoin's journey all the way since it was minted by miners.

A tainted coin refers to any coin that comes from an illicit source. For example, if the FBI determined that a bitcoin was received in illegal activity, they could mark it as tainted. Since blockchain is "permissionless," nobody can stop the tainted bitcoin owner from spending it. However, all the transactions from that point on will also be tainted. And the government denies these coins from being converted into the real-world finance system.

This is like if some cash was once in the hands of a drug dealer and being tracked by the government, and you received the cash unknowingly, your cash will be denied when you try to deposit it into a bank. Would it be OK if that happens to you?

In my view, the real sanction should happen at a "wallet-level," instead of at an "asset level." You shouldn't be punished if you receive some "tainted assets" unknowingly. And the burden of proof should be on the government if they think you knowingly accepted the tainted assets.