Marathon Miners Have Started Censoring Bitcoin Transactions; Here’s What That Means – CoinDesk

Marathon Digital Holdings (MARA) new mining pool has mined a bitcoin block that is fully compliant with U.S. regulations, meaning the company has started excluding transactions from entities it believes are sanctioned by the U.S. Department of Treasury or have been involved in dark web activity.

The Marathon OFAC pool, which was first announced in late March, refrains from processing transactions from those listed on the U.S. Department of Treasurys Specially Designated Nationals and Blocked Persons List (SDN) to stay compliant with U.S. regulatory standards, according to the company.

Marathon said it is addressing a concern among many large funds and corporations that have expressed interest in purchasing bitcoin by marketing its mined bitcoin as OFAC-compliant. Marathon spokesman Jason Assad confirmed that the firms first OFAC pool block censored some transactions, but didnt specify which ones.

By excluding transactions between nefarious actors, we can provide investors and regulators with the peace of mind that the bitcoin we produce is clean, ethical and compliant with regulatory standards, Marathon said in a statement.

It should be noted that Marathon is mining compliant blocks of its own volition and that nothing in the current U.S. regulatory or legal code explicitly mandates that practice for miners.

The company uses DMGs Walletscore blockchain surveillance software to filter transactions, Assad told CoinDesk. The blacklist is based on information provided by the U.S. Department of the Treasury and Office of Foreign Assets Control, databases of OFAC restricted cryptocurrency addresses, as well as other sources including the dark web, he said.

Iran, which is included on OFACs sanctions list, is a hotbed of bitcoin adoption, partly in response to the pressures sanctions place on its citizens. (Notably but unrelated, Irans government just said that only bitcoin produced in Iran is legal to trade.)

What are clean bitcoins?

The practice of censoring transactions, sanctioned or otherwise (put another way, excluding them from blocks because of the senders presumed identity), is a subject of heated debate within the Bitcoin community. Satoshi Nakamoto designed Bitcoin mining to facilitate permissionless and censorship resistant transfers of value, but initiatives like Marathons undermine that feature for no reason, critics say.

It is totally against the Bitcoin ethos as they are trying to make it a permissioned protocol instead of open for all, said Ben Carman, a Bitcoin Core and Suredbits developer.

He also said Marathons approach doesnt make sense. They are mining blocks that will not have the highest fee transactions, but (are) still on top of blocks with transactions they deem bad, giving them more security, he said.

Others also questioned the practicality of making a compliance claim.

Indeed, despite Marathons surveillance, transactions from a Russian dark web market, Hydra, were still processed in the clean block.

Further, shortly after Marathon blazoned the clean block on social media, bitcoiners from Iran and around the world began to send bitcoin to the address that received the Marathon clean block reward. The gesture was meant to display how easy it is to undermine Marathons initiative (and thus demonstrate how futile the chase is for clean coins).

Miners speaking to CoinDesk from other pools declined to go on the record about Marathon and its compliance push, but the sentiment was generally negative. One miner laughed at the notion, while another called it a manufactured issue.

The economics of a compliant bitcoin block

Marathon began directing its hashrate, or computer processing power, to the OFAC pool on May 1 and mined its first block on May 5, Bitcoin block 682170. That blocks transaction fee reward, 0.05 BTC (worth less than $3,000 at the time) is substantially less than the fees collected in the blocks before or after it (both of which were 0.31 BTC or ~$17,800). Block 682172 included 0.48 BTC for nearly $28,000.

BitMEX Researchs diagnosis notes that the block contained 0.00330944 BTC less transaction fees than expected. The block excluded a number of transactions that BitMEXs own hypothetical template would have included, which could indicate censorship, the post said.

Interestingly, it also included many transactions that BitMEXs model excluded because their fees were too low to be considered a priority. That could indicate out-of-band payments for the fee, BitMEX says, which are under-the-table payments that are not included in the payers transaction.

If Marathon is not receiving out-of-band fees, then so far its compliant blocks are netting significantly less in transaction fees. That portion of the block reward has become increasingly important for miner profits as bitcoins block subsidy has dwindled to its current rate of 6.25 BTC per block and demand for bitcoin has grown.

Marathons block occurred only a minute after the one before, which could explain the blocks lower fee reward and transaction count. Marathon, however, still used it to censor transactions that, for other miners, would have gone through.

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Marathon Miners Have Started Censoring Bitcoin Transactions; Here's What That Means - CoinDesk