Amid Tornado Cash Penalties, Crypto Decentralization Remains a Conundrum


When the movie “I, Robot” highlighted the dilemma of trying to program ethics into robots through the “three laws,” the dystopian future of machines rebelling against humans still remains a production of fiction. Hollywood. However, between artificial intelligence and smart contracts now programmable on a blockchain, it seems like the future of how we enforce our morals and rule of law in a world of code and machines is suddenly here.

Despite the popularity of Terminator, I, Robot, or any other sci-fi movie that tries to figure out what could happen to the human race, we still find ourselves woefully ill-prepared for a dilemma between our privacy rights in a world of digital money against the potential for future cataclysmic events that could be funded by these same “privacy-enhancing” tools.

However we imagine the future, the present puts us to the test, like a smart contract on Ether
eum blockchain called Tornado Cash finds itself on a sanctions list, along with other individuals and companies. The way the US government has managed to further complicate the issues of a complex space is quite impressive amid the creation of NFTs, DAOs, and DeFi. The problem that exists and the long way to go involves trying to develop a paradigm for how regulation might occur in a decentralized landscape.

Ari Redbord, Legal and Government Affairs Manager at TRM Labs, interviewed me to help dissect the issue. Redbord affirmed the complexity of what we have seen unfold over the past week. “And I think Tornado Cash is particularly complicated because it’s really OFAC’s first action against a cryptocurrency company of this size, but also a cryptocurrency company that touches on this very legitimate business. Is not it?” said Redbord. Having previously served as a senior adviser to the US Treasury Department’s Undersecretary of Terrorism and Financial Intelligence, he further pointed out that “…regulators like the Treasury are saying, Look, we obviously don’t ban technology, but what we’re doing here is saying if you’re a service that allows North Korea and other cybercriminal elements to launder billions of dollars in stolen goods, then you’re going to be the target of sanctions.”

I also interviewed Kathy Kraninger, vice president of regulatory affairs at Solidus Labs and former director of the Consumer Financial Protection Bureau. Kraninger broke the paradigm from the perspective of the sanctions list that OFAC maintains. “The sanctions list is an identity concept. You have a person in the real world that you are trying to prevent from accessing illicit funds that they have earned through terrible means,” Kraninger said.

Beyond the immediate threat of how to ensure a “tool” doesn’t cause a national security crisis, Kraninger pointed to consumer protection issues for anyone who might have their wallet “dusted” or send money. Tornado Cash cryptocurrency without asking. “The imperative to stop the illegal activity is there, but the opportunity for people who aren’t Jimmy Fallon or Brian Armstrong to prove the negative that they weren’t involved at all where their wallets were dusted … raises all sorts of difficult implications in this space,” Kraninger said.

Kraninger pointed to the complications associated with cryptocurrency and sanctions enforcement, in that “…people clearly caught in the crossfire who shouldn’t be associated with sanctions lists at all and therefore trying to figure out how to really separate that in a smart way is something they need to communicate about as well.”

In the words of Winston Churchill, “…riddle, shrouded in mystery, within an enigma”, Tornado Cash has clearly sent shockwaves through the ecosystem as to how to interpret what behavior for IT people might upset them. the law. Redbord said, “Is it complicated by the kind of decentralized nature of it being software, not necessarily an entity or an individual? Absolutely.” Kraninger said: “It becomes a challenge when you don’t have a real identity or a real intermediary in a system that you can actually get your hands on…software, protocols and wallets that you can create on your own with software.

Redbord described more obvious cases where penalties are applied as he describes, “darknet market advertising, such as mixing services, like Helix and Bitcoin
fog, which were literally criminal enterprises that advertised on the dark web, to launder crypto funds.”

So while many worry that we’re getting more signals from regulators that could create a scary event for creativity and exploration, Redbord noted a light that could be at the end of the tunnel in all of this. “I think kind of a general theme is maybe there’s a technological solution to all of this. It doesn’t have to lead to over-regulation. Because look, if you don’t trust an exchange, because that you believe it is going to be hacked, or you are not going to put your funds into a defi protocol, because you think they might be stolen, or you are not going to put your funds into crypto.This new financial system that we’re building together only works if there’s a layer of trust, and I think we kind of help build that layer of trust by providing tools to prevent illicit actors from taking advantage of it.

Kraninger described Solidus Labs’ work focused on “understanding this ecosystem and building market monitoring solutions into a full suite of off-chain capability compliance for fiat and crypto and integration with analytics companies. blockchain”. Of Redbord and his role at TRM, he said, “…from a TRM perspective, listen, our job is to make sure our customers have the tools they need to comply with sanctions…We want to ensure that our clients have the tools to mitigate the risk of exposure to cash flow tornadoes in the future.”

Hopefully companies like Solidus Labs and TRM Labs can help create a compliance program that will satisfy authorities and at the same time allow cryptocurrency developers and programmers to still have the sense of freedom that is essential to developing these decentralized offers. In the meantime, policymakers should consider and perhaps rethink what an effective and fair sanctions regime looks like in a digital asset landscape as a priority.

Disclosure: I have no direct interest in Solidus Labs or TRM Labs.

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