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

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 Treasury’s 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 firm's first OFAC pool block censored some transactions, but didn’t 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.

Read more: How Bitcoin Mining Works

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 DMG’s 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 OFAC’s sanctions list, is a hotbed of bitcoin adoption, partly in response to the pressures sanctions place on its citizens. (Notably but unrelated, Iran’s 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 sender’s 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 Marathon's 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 Marathon's approach doesn't 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 Marathon’s 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 Marathon’s 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 block’s 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 Research’s diagnosis notes that the block “contained 0.00330944 BTC less transaction fees than expected.” The block excluded a number of transactions that BitMEX’s own hypothetical template would have included, which “could indicate censorship,” the post said.

Interestingly, it also included many transactions that BitMEX’s 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 payer’s 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 bitcoin’s block subsidy has dwindled to its current rate of 6.25 BTC per block and demand for bitcoin has grown.

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