For the issue of freeze and seize by law enforcement authorities

Dear All,

My name is Jim Lin. I have the following questions to ask the experts in the community:

The FATF updated guidance, “Updated Guidance for a Risk-Based Approach to Virtual Assets (VA) and Virtual Asset Service Providers (VASPs)”, published on 28/10/2021, stating in paragraph 119: “As with other types of property or proceeds of crime, countries should ensure that competent authorities have responsibility for expeditiously identifying, tracing, and initiating actions to freeze and seize VA -related property that is, or may become, subject to confiscation or is suspected of being the proceeds of crime.”. In practice, the VASPs can only assist jurisdictions, law enforcement authorities, prosecutorial authorities or competent authorities to blacklist the addresses of VA that are the proceeds of crime. If the proceeds of crime are not transferred to the VASPs, they cannot be freeze and seize VA.

I have studied the black hole protocol scheme. However, I would like to ask experts whether the following goals can be achieved in Tezos?

  1. When the judiciary ruled that the law enforcement authorities can freeze and seize the VA of a specific address, and the official documents determined by the court can be confirmed by a third-party unit, can the third-party unit issue a request to Tezos to do injunction for the VA of a specific address transactions?

  2. If, in the final judicial judgment, it is proved that the VA of a specific address that had a injunction are not proceeds of crime, can the third-party unit issue a request to Tezos to do revocation of injunction for the VA of a specific address transactions?

Because, I have to write some comments to FSB/BIS on the regulatory framework for stablecoins recently, so I have the above questions to ask all experts for advice.

Thank you all!

  1. No, they cannot force the tezos network to control your funds, unless they had 51% of the network to do this, even then, it will be difficult.

  2. No they can’t. Similar situation to 1)

never say never, but it’s unlikely. let’s game this out with some draconian and unrealistic assumptions.

let’s say the TF entity can be compelled to inject and vote for a proposal that would enable this functionality at the protocol level. let’s further assume that voter apathy passes this proposal all the way to the adoption phase. this is unlikely. even at this stage private validators can decide not to deploy the proposal on their nodes thereby forking the chain.

this could happen. a cursory look at voting data on agora and roll distribution on tzstats gives me this:

G was promoted with just 19% participation, then 68% exploration, and 68% promotion. H, which some people lobbied for heavily, was promoted with 31% but the split within that vote was 55/45, meaning only 17% of the rolls voted in favor of the winning proposal. coinbase has at least 10700 rolls, which is 12.7%; the foundation controls at least 15.88%, binance and kraken another 15%. that’s 43.5% of the total and remember that pass votes count towards quorum and that bakers generally vote as a unified bloc. quorum threshold decreased between G and H by half a percent.

the question really is if a government entity decide to outlaw conversations from xtz into sovereign currency, which is of course the same for all crypto. and if one government does it, how would the rest of the world react. all else being equal, you’re much more potentially screwed with things like ava and solana.

Dear All,

First, thanks for all kind feedback.

Basically, when designing this goal, I should design the following constraints:
A. We cannot control the private key for everyone wallet.
B. The possibility of 51% attacks cannot be achieved, or a hard fork occurs.
C. It must be a formal injunction issued by the court before it can be executed reasonably.
D. The simpler and efficient method.

Therefore, if I limit the target is freeze, is the following method feasible?

  1. When the third-party unit receives the court’s injunction order, it will establish a blacklist database of the addresses of proceeds of crime.
  2. The baker for per block will inquire blacklist database first, then do baking.
  3. When the baker generates a block, if it finds that the transaction in the block have blacklisted addresses, the transaction of that addresses are excluded, and a new block is generated.

If this method works, it would be great! Afterwards, we can discuss issues such as seizing VA, asset recovery and deposit insurance in stages.

Thanks more.

1 Like

G, are you planning a money-laundering scheme?

Dear Ali,

About freeze and seize VA, they belong to the parts of AML/CFT framework for VA. As for asset recovery and deposit insurance, they are topics of consumer protection.

Thanks more.