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Bitcoin Must Be Made Legal Tender (Your Coins Aren't Safe Until It Is)

"Your keys, your crypto." We have all seen this phrase. It is true, up to a point. That point is Bitcoin's lack of legal tender status (except in El Salvador, maybe a few more places by now).

For background, money or currency is given legal tender status by a government, usually the government that issues it. That status means money is treated differently than other property or assets.

Some transactions may only be settled with legal tender. Besides taxes and government fees, real estate, legal settlements, and court-ordered payments must be paid with legal tender.

Those aren't the only purpose behind legal tender. For example, if a thief steals some cash and then spends that cash buying a large-screen HD television, the retail shop that sold the TV does not have to give up the cash it received for the sale of the TV. But if a thief steals that same TV and sells it to some unsuspecting buyer, the TV would have to be given up without recompense if traced to the buyer. The difference is that the TV is a specifically identifiable item, where the cash (legal tender) is not. See this article for a discussion on separately-identifiable assets.

Being specifically identifiable is a flaw in Bitcoin, which can only be addressed by giving Bitcoin legal tender status. Recall that every satoshi of Bitcoin (BTC) can be traced back to the block reward for a miner.

Being specifically identifiable means you might have to give up your Bitcoin (BTC) if it was the proceeds of illegal activity. Unless you received your Bitcoin (BTC) as a mining reward, or directly from a miner, it could be at risk of being seized. Not giving up the wallet keys could get you in additional legal hot water if the demand for the wallet keys was made by a court or other authorities.

Of course, the authorities would have to tie your self-custodial wallet (you are using a self-custodial wallet, right?) to you. This would probably happen if you moved funds from an exchange to the same "tainted" address. Another reason why you should always use a new address for every transaction (see my post on HD wallets here). If you held the funds on an exchange, the exchange will probably give up your funds without much of a fight, since they are holding the funds for you, mixed with everyone else's funds.

Revenue-hungry governments may start going after law-abiding crypto owners who received crypto that can be traced back to illegal proceeds. Unscrupulous governments may sell their seized Bitcoin (BTC) and then go after it later, based on the original bad transactions, leaving it up to the crypto owner to prove that their Bitcoin (BTC) passed through the government's hands (good luck with that, and it may not even matter to a court). Seize, sell, and repeat.

Being legal tender means that a legitimate transaction will not be reversed and crypto would not be seized just because of a prior transaction was deemed illegitimate by a government. If Bitcoin (BTC) is made legal tender, then it can be transferred absolutely for settlement of a legitimate transaction, with no possibility of reversal.

Bitcoin mixers may aid in obfuscating the trail of your Bitcoin (BTC), but they have their own risks. Some may be fraudulent and steal your funds. Some may be the target of governments and your use of them may put you under suspicion for some crime. Some may even be run by a government to track illegal activity. The recent crackdown by the US Government on Tornado Cash (an ETH mixing service) is probably only the beginning of a move to get rid of Bitcoin mixers. I understand that the source code of Tornado Cash is available somewhere, so mixers will probably keep popping up. If you know of a legitimate Bitcoin mixer, please post its address in the comments below.

Bitcoin (BTC) is not the only coin with specifically-identifiable funds. Other altcoins, mostly those based on Bitcoin code, have the same problem. However, it is very unlikely that they would ever be made legal tender, so they will always be at risk.

Of course, I am not a lawyer, nor do I play one on TV, so this is not legal advice. This is also not financial advice. Do Your Own Research (DYOR). Let's be safe out there.

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Crypto enthusiast since 2014

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Crypto Musings, Thoughts, Feelings, and Opinions

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