This service will work by asking Bitcoin businesses to voluntarily (at first) violate their customer's privacy by providing them with a list of every bitcoin address known to be associated with that customer. The list will be used to create a database of "clean" addresses, where clean means tied to AML/KYC information, with the ostensible goal of allowing these businesses avoid "tainted" Bitcoins.
The first thing to note about this plan is that it will in no way remain voluntary. Regulators in the US and possibly other countries are waiting for such a database to exist so that they can require all companies in their jurisdiction to only accept payments from customers whose identities can be fully tracked. So far they have not been able to require this because the technology does not exist, but Matt Mellon, Alex Waters, and Yifu Guo are apparently willing to build it for them. Now you know who to thank for selling out your financial privacy.
The second thing to note is how badly it damages the value of a Bitcoin balance. Do you currently care about the complete history of every physical currency note you carry in your wallet? What if stores would suddenly reject your cash because two years ago someone you never even met used in the commission of a crime? How willing would you be to accept dollar bills if you were suddenly responsible for the actions of every other person who had ever touched them?
This kind of tracking destroys a very important principle of all currencies: fungibility. If Coin Validation is accepted by merchants and exchanges, the value of Bitcoin as a frictionless medium of exchange will be largely destroyed. One of Bitcoin's greatest features - freedom from prior restraint - will be gone forever.
Countermeasures
Use and create non-US alternatives:
It's virtually certain that every US-based Bitcoin company, as well as any company backed by venture capital firms, as well as any currency exchange which deals with USD is going to sign on to this plan. Bitcoin users who wish to retain their privacy should avoid dealing with all of these companies, as well as create alternatives that are based outside the United States and not susceptible to political pressure.
Mobilize the international Bitcoin community:
It's virtually certain that every US-based Bitcoin company, as well as any company backed by venture capital firms, as well as any currency exchange which deals with USD is going to sign on to this plan. Bitcoin users who wish to retain their privacy should avoid dealing with all of these companies, as well as create alternatives that are based outside the United States and not susceptible to political pressure.
Mobilize the international Bitcoin community:
Non-US Bitcoin users should demand that Bitcoin companies in their countries respect their privacy and refuse to participate in this or any other surveillance scheme.
Use privacy-enhancing technology:
Protocols like CoinJoin and CoinSwap, if properly implemented and used, can render the information in this database useless. Anyone who cares about financial privacy should ask the developers of their wallet software to implement this ASAP.
Practice good Bitcoin hygiene by never using the same address twice.
Help fund the development of privacy-respecting wallets.
Abandon traditional businesses:
There's no point in lobbying traditional businesses based in the US and other repressive regimes to resist this kind of pressure. They are too vulnerable to pressure and are going to do whatever the regulators tell them to do.
They are, however, in no way essential to the future of Bitcoin.
Practice good Bitcoin hygiene by never using the same address twice.
Help fund the development of privacy-respecting wallets.
Abandon traditional businesses:
There's no point in lobbying traditional businesses based in the US and other repressive regimes to resist this kind of pressure. They are too vulnerable to pressure and are going to do whatever the regulators tell them to do.
They are, however, in no way essential to the future of Bitcoin.
The economy of the future is System D. Traditional businesses with their physical offices, corporate charters, bank accounts and licenses are holdovers of a dying paradigm. We should focus instead on creating tools to empower individuals to create censorship-resistant business models.
We will not build a bridge to the future by conforming to the past. While it's unfortunate that traditional Bitcoin businesses are trapped in a position where they must cripple the features of the currency in order to be allowed to operate, we as a community must continue to move forward even if it means leaving them behind.
We will not build a bridge to the future by conforming to the past. While it's unfortunate that traditional Bitcoin businesses are trapped in a position where they must cripple the features of the currency in order to be allowed to operate, we as a community must continue to move forward even if it means leaving them behind.