Tornado Cash (Vitamin3 story)
Last week, the U.S. Treasury Department made it illegal for Americans to use crypto protocol Tornado Cash. Since then, Circle - issuers of stablecoin USDC - and other centralized crypto companies have frozen assets & wallets that have interacted with Tornado Cash. On Friday, Dutch authorities arrested a Tornado Cash developer. In response, the Crypto community has been enraged. Why all the hubbub?
(2/3) Tornado Cash is a decentralized "crypto mixing" protocol, giving users more on-chain privacy. Typically, all crypto transactions are recorded on-chain, so there is no privacy-anyone can monitor all of your wallet's transactions. With Tornado Cash, you can "mix" your crypto with crypto from other users, making it hard to determine whose crypto came from where thus adding a layer of privacy.
(3/3) There are 2 sides to this story: (A) Tornado Cash is a privacy tool, allowing users to transact safely & without harassment (many used it to donate to Ukraine without Russian retaliation); (B) Tornado Cash is a money laundering tool (North Korea used it after hacking $600m).
This week, we'll explore both sides and broader topics in privacy, free speech & anti-money laundering.
(1/3) The govt perspective on Tornado Cash (TC) is pretty clear. The goal of crypto mixers, like TC, is to hide the source of funds and make it easier to move money without observers being able to tell where the funds came from or where they were sent. This can clearly be used to launder money. One report showed >$1.5B of illicit money has moved through TC (the U.S. govt alleges up to $7B).
(2/3) TC was put on the Office of Foreign Assets Control's (OFAC) blacklist, immediately prohibiting U.S. citizens & businesses from using TC. The govt cited: "Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors" and highlighted that hackers have used TC to hide stolen funds (including North Korea's Lazarus Group).
(3/3) On Friday, the Dutch govt arrested a software engineer who helped develop TC for being involved in "concealing criminal financial flows and facilitating money laundering" through TC. "Multiple arrests are not ruled out.”
In summary, one side of the story: Crypto mixers like TC make it easier to do illicit activity online, so they must be banned. Tomorrow, we'll discuss the other side.
(1/4) Yesterday, we discussed govt perspectives on Tornado Cash (TC). Today: crypto perspectives.
Privacy: Outsiders often say crypto hides crime. In fact, the opposite is true. Every crypto transaction is recorded on-chain, so, if anyone knows your wallet address, they can monitor ALL your transactions. Would you want everyone to know your income or EVERY item you buy on Amazon? TC gives crypto(2/4) users the privacy of traditional payments.
Free speech: Open source code is protected as free speech. Arresting TC developers (devs) violates this. Devs created a privacy tool for anyone - the tool itself is neutral. Hackers who use TC for the illicit activity should be punished; not the devs. When a DUI driver does a hit & run, is Toyota punished?
Censorship resistance: Crypto protocols are autonomous (run by smart contracts not humans) and blockchains are immutable (can't be changed). The TC website was shut down, but its open-source code still exists on Ethereum. Devs can be arrested, but can't switch TC off. In theory, hackers can still use TC software to mix their crypto (if there's enough other crypto to mix with).
The crackdown doesn't fix the right problem.
Philosophy: Crypto evangelists build decentralized tools to remove middlemen & prevent govts from arbitrarily punishing or freezing citizens' assets. The TC crackdown was arbitrary, without warning & may violate 1st Amendment rights. It also creates a bad precedent that may stifle innovation in crypto & beyond.
We've now discussed 2 sides of the story. Tomorrow, we'll try to reconcile them.
We've discussed 2 sides of the Tornado Cash (TC) story: (A) TC is a money laundering tool, allowing users to hide dirty money; (B) TC is a privacy tool, allowing users to transact safely. How can we reconcile these views?
Both clearly have some merit. Privacy in financial transactions is important. It's not safe to have neighbors know your salary, how & where you spend all your money, etc.
Users shouldn't have to forfeit privacy & safety to use crypto.
But, it's also no surprise TC was targeted. "In US law, money laundering is the practice of engaging in financial transactions to conceal the identity, source, or destination of illegally gained money." Keyword there is "illegally," but at least 35% of funds locked in TC last week fits this description. The govt can't ignore that, and neither should the crypto community. Products supporting large scale illegal behavior play into the "crypto is for crime" narrative and hinder mainstream adoption. The question: can platforms like TC promote privacy & safety while preventing crime?
What's troubling is TC was shut down without warning or a path to eliminate illegal activity on its platform. TC started trying safety(4/5) controls back in April, but it was early days. The govt could have sanctioned wallets of known hackers and worked with TC to prevent crime. Banks have had countless insider trading cases against employees; those banks still exist.
Perhaps, most troubling is the TC developer arrest. As discussed yesterday, open source code has historically been considered free speech. Breaking that precedent(5/5) could have a chilling effect on software innovation. Plus, crypto protocols are autonomous & permanent once they're deployed on a blockchain. If a product has unexpected consequences (or illegal behavior), there's not much a developer can do after the fact.
This leads to a tough but important question: How much responsibility (if any) does a product's creator have for how a product is used?