Perpetually KYC'd Coins Using Evil Covenants

Perpetually KYC'd Coins Using Evil Covenants

Original Postby RobinLinus

Posted on: February 13, 2024 17:10 UTC

The European Union is making significant efforts to regulate Bitcoin through stringent Know Your Customer (KYC) laws, as detailed in a comprehensive explanation by CoinDesk.

This regulatory push could potentially lead to the introduction of perpetual KYC contracts within Bitcoin's protocol, a development that might be welcomed by financial institutions for its promise of regulatory compliance alongside benefits like fast international settlements and a capped supply. The concept of "evil covenants" is introduced as a means to explore how such perpetual KYC mechanisms could be implemented using Bitcoin script opcodes such as OP_CTV, OP_CSFS, OP_CAT, and OP_EXPIRE.

A perpetual KYC contract would operate by having the government sign the Merkle root of an approved whitelist every two weeks, along with the current date. This signature would then be checked by the contract using OP_CSFS. The recipient's address inclusion proof is verified with OP_CAT, and the covenant enforced via OP_CTV. To ensure the currency of the government's signature, OP_EXPIRE limits its validity to a maximum of two weeks.

Several features of this approach highlight its potential impact on both regulation and user security. For instance, the whitelist can be updated without altering existing Unspent Transaction Outputs (UTXOs) contracts, and the government does not need to run a cosigning server or use a hot key for signing, enhancing security via offline, air-gapped devices. Additions to the whitelist can be made at any time, with removals happening bi-weekly. Only updates to the list and new signatures need publication on static file servers, simplifying the process.

Furthermore, the contract allows for the adjustment of spending limits based on KYC status, potentially imposing caps on transactions with non-KYC'd addresses or requiring stricter KYC for higher-value receipts. This feature aims to make self-custody safer by preventing the theft of KYC'd coins. Additionally, the government retains the ability to compel users to update their contracts and can relinquish control over Bitcoin held under this policy by whitelisting certain non-covenant addresses.