A curious case of fungibility — could this affect Monero, or is it just nuance/unavoidable?

Hi all,

This was sent to me via private channels and I offered to share it for broader feedback, as I wasn't 100% sure how to respond. It's quite an interesting case of possible fungibility/provenance issues, but I don't think it's a technical flaw as much as a unique case, but curious to hear the community's thoughts:

Recently I had a lenghty discussion with a friend of mine about Monero's fungibility. I came across a real life situation which made me realize that Monero might not always be as 100% fungible as I thought. Let me try to explain…

Let's say hypothetically that I own and have spent Monero in a way that is illegal in Country A. When you get or buy something that is seen as an asset, you are obligated to disclose this to the Oppressive Tax System (OTS) – you have to basically answer to these three questions: how much, when, and where. So for example, if I buy stocks, I have to disclose it to the OTS; how much I bought, when this happened, and which exchange I used. Or if I have Bitcoin, or Monero, or any other cryptocurrency, I have to disclose it in a same way to the OTS. It's illegal to not disclose your assets and that can be seen as tax fraud. This also applies to the realization/liquidation and spending of the asset. So let's say that I've perfectly disclosed all my assets to the OTS, but then I buy a car with my Monero and I don't disclose it to the OTS – that would be a tax fraud.

So the citizen has a burden of proof on how (s)he got the money/assets and what he has done with them. This same applies to the Fiat currency. So for example if I somehow get 100k worth of $ in cash and I go the bank, they will pretty much freeze my bank accounts and contact the OTS and other authorities. I would need to somehow prove that the $100k isn't illegal money and I have paid my taxes etc. correctly. Okay so let's say that I have total of 1000 XMR which I've got in random amounts between 2017-2021, and I haven't informed the OTA about it. Now I want to buy a house. Unfortunately I can't use Monero, I need to use $. I decide to sell 100 XMR for $. I withdraw the $ from the exchange and the $ arrive to my bank account. Now the bank is like:

"Hey! Where did you get these $100k?" I reply: "Umm, well… I sold 100 XMR in Kraken…" "Until you verify the source of your 100 XMR we have decided to freeze your bank account and we also have notified the OTS about this issue. Please fill the 1337 pages long form so we can verify that you haven't done anything illegal. Please read the anti-terrorism legal text #420 and the anti-money laundering #666 act and the anti-something-so-we-can-control-the-financial-institutions-and-people bill #12345." And then I'm fucked. I have not informed the OTS that I own the 100 XMR. I would be prosecuted and in the worst case scenario I could even go to jail (because the $100k is a lot of money).

BUT! Here's the but. People can find old crypto wallets. People can find stacks of money (like from the deceasaed relatives who've hidden the cash in their home or something like that). But it must be proven to the bank and to the OTS. You can't just go the bank with $100k worth of drug money and be like "yo I found these on the street!", you must have some kind of proof of it.

And here's the catch so to speak. I could easily see myself and other people being ready to buy some "virgin" Monero wallets which do not have any spend-transactions. In my example, if I would buy a virgin wallet which has 100 XMR in it, and all the transactions are let's say from year 2015, I could say to the OTS something like:

"Six years ago I mined Monero, but then I forgot it completely. I just found the old laptop which I used for mining and I found the wallet from the laptop! Please, OTS, take a look. Here is all the necessary keys which you can use to verify that the wallet has been holding XMR from 2015 to this day, and there have been no other transactions on it. Pure mining Monero!" "Seems good. We verified the wallet with the keys you provided and it matches to your story." says the OTS and now I have perfectly legally converted Monero -> $ (of course I need to pay income tax, but the source where I got the XMR isn't illegal).

So if there are people willing to buy this kind of "virgin" Monero wallets with let's say 1 XMR = 1.5 XMR price, does it still mean that Monero is completely fungible?

I could come up with couple of these real life cases which are also completely realistic. There might be even more cases similar like these, because I only know how these laws work in Country A but not elsewhere. I would assume that Country A is not the only country with these types of laws – and probably laws like these will be more strict and common in the future.

I could see a future, or not even a future, because right now, for example I would be ready to buy one or multiple "virgin" wallets. And I can easily see that these types of wallets could gain more interest in the future when people are trying to convert some of their XMR -> Fiat. Then the core fundamental of Monero, that 1 XMR = 1 XMR, wouldn't always hold.

Any thoughts on this?

submitted by /u/fort3hlulz
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