What is censorship resistance?

Before defining censorship resistance, it’s important to understand what censorship is in a financial context. Financial censorship is the suppression of financial activities, such as preventing you from spending your money on something, canceling transactions you’ve had with another party, or freezing your financial assets.

Governments are traditionally the main censors, though other financial intermediaries like banks, credit card companies, and web2 platforms, are suppressing financial activities more and more. Censorship resistance, then, is the ability to carry out financial actions despite the wishes of any third party.

As mentioned above, the three pillars of crypto censorship resistance are:

1. The freedom to transact: Third parties cannot prevent you from sending or receiving assets.
2. The freedom from confiscation: Third parties cannot take away or freeze your assets.
3. The immutability of transactions: It is nearly impossible for third parties to change transactions after the fact.

In traditional finance, gold is censorship resistant, whereas almost all government issued fiat currency is heavily censored. Cash is more censorship resistant, but it accounts for a minority of fiat. For example, USD currency in circulation represents approximately 10% of the total USD money supply, this doesn’t even account for the Eurodollar market.

Degrees of Censorship Resistance

Censorship resistance exists on a spectrum, with some assets being more censorship resistant than others.

Cash (physical bills) in your wallet has a pretty high degree of censorship resistance. You can give it to anyone you want, and once you give it to that person, it’s hard for someone else to come along and reverse the transaction. Cash is somewhat vulnerable to confiscation though, which is why it may not be the best form of money for refugees to flee with. For obvious reasons, it’s also not advisable to keep all your savings stuffed in cash under your mattress.

Compared to cash, most assets in modern finance are highly censored. When it comes to money in your bank account, for example, all three pillars of censorship resistance are easily violated: It can be confiscated, you can be cut off from the ability to transact, and your transactions can be reverted.

If you don’t believe this to be true, consider the following examples:

• Operation Choke Point, an initiative of the United States Department of Justice that ran from 2013 to 2017, saw the US government pressuring banks to deny service to people involved in a variety of (legal) industries it had identified as “morally corrupt.”

• In 2021, at the behest of the Canadian government, Banks and payment processors prevented Canadian citizens from sending donations to certain parties it had identified as politically undesirable. The government also froze or suspended the bank accounts of Canadian citizens. They did so without evidence or court orders.

• Paypal made international news in 2022 when it released an updated policy that let Paypal fine users $2,500 for spreading “misinformation.” Paypal quickly retracted the policy in public, though much of the language remains. This includes $2,500 fines that have existed since September 2021 for the very vague “promotion of hate, violence, racial or other forms of intolerance that is discriminatory…”

Some cryptocurrencies are considered highly censorship resistant, with Bitcoin likely being the primary example. The technical reasons for the high degree of censorship resistance enabled by cryptocurrency in general and Bitcoin specifically are complex — and we encourage you to dive deeper into this subject via our Learning Center — but suffice it to say that the technology enables all three pillars of censorship resistance to be upheld to a large degree. As long as you “self custody” your holdings using a tool like the Bitcoin.com Wallet and maintain password management and security best practices, no one can take your money and no one can prevent you from transacting. Any transactions you do complete, cannot be reverted.

Why is censorship resistance important?

Censorship resistance in the financial context is a powerful tool for pushing back against the encroachment of strong public and private entities. Censorship resistant financial products make it that much harder for governments to appropriate their citizen’s freedoms, economic or otherwise. They also provide a check on financial institutions and companies by offering customers a viable alternative.

Let’s look at some real-world examples to illustrate the importance of censorship resistance:

Capital controls

Capital control refers to a form of financial repression where governments restrict the ability of citizens to move their money into foreign assets like dollars, gold, or equities. Citizens are effectively forced to hold only the approved financial instruments of the regime. The goal of capital controls is often to artificially support the local currency, especially where inflation is high. In many cases, governments deliberately inflate the national currency while maintaining capital controls. By preventing citizens from converting their wealth into foreign assets in a high-inflation environment, capital controls effectively take wealth from citizens and give it to the state.

High inflation is now a global phenomenon, with rates doubling in 37 of 44 advanced economies between 2020 and 2022. The global average sits at 7.4% and now billions live in countries where inflation is in the double digits. Nearly every country has some form of capital control, but as inflation increases, so too does the implementation of stricter capital controls which have greater potential to harm economic freedom.

Cryptocurrencies, thanks to their high degree of censorship resistance, enable people to bypass capital controls, avoiding their most damaging effects. Furthermore, if enough people in a country have access to assets that are resistant to capital controls, it becomes difficult for a regime to enforce capital controls. This may encourage the regime to engage in more responsible economic management in the first place.

Bank runs

The money in your bank account is not legally yours. When you deposit money, you are loaning it to the bank, which is why you can earn interest on your deposit. When you withdraw, you are effectively recalling the loan. However, because banks don’t hold 100% of deposits in liquid cash, they can’t honor 100% of withdrawals (recalled loans) in the short term. A bank run is the name for the unfortunate situation where a critical mass of depositors decide to withdraw their money suddenly, draining the bank of its liquid cash holdings, and leaving all other depositors unable to withdraw.

If a bank run happens at a small scale in a regulated market, depositors will most likely be made whole eventually and up to a predetermined amount ($250 thousand via the FDIC in the US, £85 via FSCS in UK, etc.). The real danger is when bank runs occur at a nationwide level or in unregulated markets.

In the nationwide case, the response to a bank run is typically for the government to impose restrictions on withdrawals. For example, in Greece in 2015, people were restricted to withdrawals of 50 euros per day. Restrictions were not lifted until 2018. In Lebanon, after years of banks imposing draconian control on deposits in an attempt to halt rising inflation, desperate depositors resorted in 2022 to robbing banks in an attempt to get their own money back.

Something like a bank run can also occur in centralized cryptocurrency exchanges, acknowledging that such exchanges are not technically banks. This happened to dramatic effect in 2022 with the collapse of Celsius, Voyager, FTX, and Blockfi among others. Irresponsible and sometimes criminal mismanagement of customer deposits led to a loss of trust that trigged a stampede to the exit. Since exchanges didn’t have the assets needed to honor deposits, they suspended withdrawals. Anyone left with deposits on the exchange will most likely never see their money or, if they do after years of legal battles, it will be a fraction of what they deposited.

Cryptocurrencies that are held in self-custody are impervious to bank runs. That’s because you are the bank. Instead of having merely a claim on your money, as you do with a traditional bank or a centralized cryptocurrency exchange, you retain custody of your money, more like cash in your pocket.

It’s important to note that the use of cryptocurrencies doesn’t preclude engagement in financial activities that generate yield, such as borrowing and lending. Decentralized finance, or DeFi, uses smart contracts to automate financial products without requiring users to relinquish custody of their assets.

Freedom of speech

Fifty-four percent of the global population lives in an authoritarian regime as defined by the Human Rights Foundation. Restrictions on freedom of speech are one of the primary autocratic features of authoritarian regimes, who use such restrictions to suppress opposition.

When people organize to resist authoritarianism, money is inevitably required, so it is money that often serves as an easy lever regimes pull to clamp down. Dissidents and opposition groups routinely have their bank accounts frozen and their assets seized.

There are many examples of dissidents turning to cryptocurrency to fight back against tyranny, such as the over $2 million in Bitcoin that was raised to fund opposition of the Belarusian dictator Alexander Lukashenko in 2020. Censorship resistant money can thus serve as an important counteracting force to authoritarianism.

Sanctions

Economic sanctions are used to apply economic pressure, forcing regimes to comply with international rules.

While sanctions are an important tool, often used for objectively good purposes, their impact on individuals can be devastating. The aim is to effect change on a non-compliant regime, but it is often ordinary citizens who are most affected. This makes the moral argument for the use of sanctions, at least those deployed at national scale, somewhat hazy. Is it fair that all citizens of Russia, for example, should suffer because of the actions of a tiny minority?

With cryptoassets like Bitcoin, individuals in sanctioned countries can retain access to global markets, enabling them to receive, for example, remittances from friends and family abroad. Importantly though, large-scale actors like governments or large companies can’t effectively use cryptocurrencies to avoid sanctions. As noted by the Financial Crimes Enforcement Network (FinCEN), this is due to a lack of liquidity in the cryptocurrency markets.

The spectrum of censorship resistance in crypto

Censorship resistance is achieved through the network architecture of a blockchain. The choices a blockchain makes for speed and transaction costs impacts the level of censorship resistance. In general, the faster and cheaper a blockchain network is, the less censorship resistant it is. As blockchain software continues to innovate, those tradeoffs should lessen, though they will probably never fully disappear.

Bitcoin is not only likely the most censorship resistant cryptoasset, it is probably the most censorship resistant network in existence. It achieves this through a process called Proof-of-Work (PoW), a process in which bitcoin is mined. You can read a more in-depth article on bitcoin mining, but suffice to say it contributes to censorship resistance. Another factor is the breadth of the Bitcoin network.

Ethereum used PoW, but switched to Proof-of-Stake (PoS), which by its nature is less decentralized, but faster, cheaper, and much more energy efficient. Most major blockchains now use PoS. Ethereum is more censorship resistant than many of its major peers because its network is very distributed. Binance Smart Chain and Solana both use PoS-like mechanisms, but their networks are quite small. In Binance Smart Chain’s case, the network is defacto controlled by a central entity — Binance. Arguably it is as censorable as any government issued fiat currency.