Where to next after Tornado Cash is sanctioned by the US government?

Last week Circle - the company responsible for the stablecoin USDC, had to freeze accounts that interacted with Tornado cash, a coin mixer designed to protect user privacy and shield the identity of the interacting parties. The move comes after Tornado mixer was put on the sanctions list by the US Treasury department after it was allegedly used by North Korean hackers responsible for a $600 million Axie Infinity hack in March 2022.

Circle is a centralized entity with full control of their product USDC, resulting in the flagged addresses being blacklisted. Circle now(09/08/2022) says they froze 84 addresses on the sanctions list. The US government Treasury Dept. sanctioned the Tornado cash protocol, which is the first smart contract to be sanctioned, meaning that all the addresses which interacted with the open-source code are to be disabled as anyone interacting is a potential criminal. Total funds frozen are reported to be 75,000 in USDC, but the department alleges that over $7 Billion could have been “laundered” through the code since 2019.

Blockchain technology provides an open ledger that allows anyone to see and track the transactions between addresses. Although personal addresses are anonymous, the on-ramps and off-ramps used to convert cryptocurrencies into fiat are mostly compliant with KYC/AML regulations worldwide and record the users' personal details to provide financial services.

AML/KYC regulations collect user information in case the authorities detect any suspicious activity. By using mixer services, the users can hide the transaction history making it difficult to trace the flow of funds. Mixer services add to the narrative of crypto being used for notorious and illegal purposes and play into the hands of regulators to protect the community. In a tweet US secretary Anthony Blinken said “We’ll continue to aggressively pursue actions against currency mixers laundering virtual currency for criminals” (Blinken, 2022), meaning that Tornado Cash was not the only target.

Now, in the eyes of the public, freezing the accounts used for activity with criminal intent is the right thing to do as the funds have been stolen and could be used to fund a sanctioned entity in this case – North Korea. How it was done should worry hardcore rights activists fighting to protect personal liberty and an everyday person as it shows how easy it is to restrict access to funds controlled by one entity for any reason. After the blacklisting by Circle small amounts of ETH were sent to thousands of addresses through Tornado Cash, many of them to ENS registered celebrity addresses. It was done to rebel against the sanctions or maybe to highlight the issue that a blanket ban on a smart contract is unreasonable. A person receiving the funds who would be affected by the sanctions might not be aware of the interaction or existence of mixer services.

In February, when a Canadian government had the idea to freeze people's bank accounts to restrict growing protests, they contacted banks and put a blanket rule with certain parameters. It resulted in people not being able to access funds to leave their cities to travel to the protests or even come back home for simple necessities like food. There was no big uprising against the government overreach as it affected only a small portion of the population. The Canadian government tried to block BTC use by asking wallet providers for help with the now famous response from “Nunchuk” wallet developers that decentralized currencies cannot be frozen. The Canadian government also reached out to on/off-ramps mainly cryptocurrency exchanges asking to restrict access to funds interacting with the 37 blacklisted addresses that had to act in unison with banks to operate in the country. This highlights the power of decentralised protocols but also the power of governments to stop anyone from accessing funds even if it is in BTC in real terms as the crypto exchanges become controlled entities similar to banks.  

One of the developers of Tornado Cash was arrested in the Netherlands on the 12th of August "suspected of being involved in the hiding of criminal financial transactions and facilitating money laundering". Tornado Cash DAO was shut down after this event to protect the community from further fallout. The arrest of a developer should raise another alarm for everyone, we are entering another level of “Big Brother” territory. The code is open source, and many contributors suddenly started posting tweets of associated accounts on Github being closed.

Privacy coins and mixer services are the easy targets when going after an unregulated asset and are a logical first step as an uproar from the community can be squashed with that same line – “The proceeds are fueling criminal activity”. The arrest of a developer is another level because so far there were no code police, except maybe in Ross Ulbricht infamous Silk Road case. We haven’t seen developers being the targets in any cases of fraudulent activity facilitated through banks, their apps or web services and international transfer services like Moneygram, TransferGo etc. We should ask how is writing a code for Tornado Cash different?

USDC is a great proxy for upcoming GBDCs around the world. It can be viewed as the US government's GBDC trial run by a private entity, Circle, already one of the biggest players in the digital currency world. The first target is privacy, we know that Defi protocols are already being probed and there were attempts to regulate the ecosystem through KYC and scaring the developers through possible prosecution. Although this is all done through the lens of consumer protection and the industry is calling for regulation, it does seem like true decentralization is in danger.

There are benefits of CBDCs if implemented right – targeted welfare, elimination of tax fraud and immediate tax collection, frictionless accounting, immediate settlement, and removal of banks as an intermediary amongst many others, but the dangers might outweigh the benefits.

A lot of people say “I don’t care I don’t have anything to hide from the government as I haven’t done anything wrong” and this apathy is taking us to a very different dystopian future where the community gives away freedoms in the hope that there is a benevolent entity which has the best intentions and full knowledge of what’s best for us - mere mortals. Governments are voted in, and most of the time, election results are not favourable for almost half the population. Decisions made by one government can impact many, and change in government doesn’t always return to the status quo, which is clearly demonstrated in Roe v Wade repeal. With CBDCs a line of code can make it impossible to access certain medication or treatment, it can limit your ability to travel or access welfare, it can limit whom you are allowed to interact with, and it can be done with a stroke of a pen from an official whom you didn’t elect. You might say it can be done already, and you would be right, but in most cases, it is not done pro-actively and only in retrospect.

We are on the cusp of a big change in our society, the sandbox environment for unregulated innovation is slowly closing in, and the understanding of implications for decisions made is not there yet. Although loud, the blockchain/Crypto community is not large enough or united enough to bring attention to the possibilities this technological advancement brings. The Crypto community is promoting only the good, and the other side is fighting back with only the bad; both sides are not genuinely open to a dialogue to highlight the concerns about personal freedoms and the limitations this technology can bring.