On September 8, Coinbase announced that it was funding a lawsuit against the United States Treasury Department. The cryptocurrency exchange is funding a six-person lawsuit challenging sanctions against Tornado Cash. And on September 9, Securities and Exchange Commission (SEC) Chairman Gary Gensler announced that he was working hard with Congress to create legislation to strengthen cryptocurrency regulation.
But these two stories are not mutually exclusive. The sequence of events proves that governments are purely reactive rather than proactive when it comes to decentralized finance (DeFi).
Tornado Cash was sanctioned by the Office of Foreign Assets Control (OFAC) in August. OFAC claimed the smart contract mixer has helped launder more than $7 billion worth of cryptocurrency since its inception in 2019, including more than $455 million stolen by North Korea-linked hackers Lazarus Group .
Coinbase CEO Brian Armstrong said in a statement that the Treasury had gone too far, taking the “unprecedented step of sanctioning an entire technology instead of specific individuals.” In addition to claiming that the sanctions were beyond the authority of the department, Coinbase argued the measures:
- Remove privacy and security for crypto users;
- harm innocent people; and
- Stifling innovation.
The next day, Gensler redoubled his efforts for tighter regulation of the DeFi market, saying that crypto companies would not thrive without it. “Nothing in the crypto markets is inconsistent with securities laws. Investor protection is equally relevant, regardless of the underlying technologies.
Related: US Treasury clarifies release of Tornado Cash code does not violate sanctions
Not only does his choice of words such as “irrespective of the underlying technologies” betray his lack of understanding of crypto and blockchain technology, his speech has caused an uproar from the Web3 community, with many claiming that government regulation is a wolf in sheep’s clothing.
Jake Chervinksy, attorney and chief policy officer at the Blockchain Association, tweeted in response: “Crypto is a new and unique technology: how it should be regulated is a major issue that Congress (not the SEC Chairman) ) must decide”.
Chairman Gensler says most digital assets are securities. Decades of case law say otherwise.
Regardless, cryptography is a new and unique technology: how it should be regulated is a major issue for Congress (not the SEC Chairman) to decide.
My opinion on WSJ: https://t.co/E7kql6Vohb
—Jake Chervinsky (@jchervinsky) September 8, 2022
Safety legislation is worrying enough. But the Tornado Cash sanctions have set an alarming benchmark for anyone involved in digital assets. Not only is blockchain technology and cryptography constantly changing – what’s secure now might not be in the near future and certainly won’t be next year – but there are a myriad of legitimate applications for it. blockchain technology.
DeFi is about privacy. The clue is in the name – decentralized finance. Mixers such as Tornado Cash further protect the privacy of its users by mixing users’ deposits and withdrawals into cash pools, hiding their addresses and protecting their identities. Users want to protect the privacy of their transactions for a variety of legal reasons.
In this case, one of the plaintiffs used the blender to donate funds to Ukraine anonymously. Another was an early adopter of crypto and now has a large following on social media, with his public name ENS connected to his Twitter account. He used the smart contract to protect his security during transactions. Now their assets are trapped in Tornado Cash.
A person’s finances include some of their most sensitive personal information. And law-abiding citizens have a right to keep that private. But it is this privacy that will be eroded by the kind of regulation recently proposed by Gensler, the SEC and other governments around the world.
Related: Coinbase-backed crypto investors sue US Treasury Department over Tornado Cash sanctions
As is the case with these penalties, arresting people for using services for lawful and even benevolent acts, not to mention locking up developers for writing open source code that was not illegal at the time of the creation, feels like Orwellian levels of dystopia. .
Treasury officials have since backtracked, clarifying in the guidance that, in fact, “interacting with the open source code itself, in a way that does not involve a prohibited transaction with Tornado Cash, does not is not prohibited”. The guide adds that copying the protocol code, posting the code, and visiting the website are all allowed.
Although not officially linked, the timing and similarities between the two stories are telling. Gensler likened the regulations to traffic control, saying, “Detroit wouldn’t have taken off without a few traffic lights and cops on the beat.” Armstrong used an analogy of freeways and burglary, saying, “Sanctioning open source software is like permanently closing a freeway because thieves used it to flee a crime scene. And he is not wrong.
How many talented developers will now be deterred from writing groundbreaking code that could not only break industries, but help people around the world? A small number of bad actors should not impede the progress of a technology with such enormous potential to revolutionize industries even beyond finance.
The Coinbase lawsuit is a pivotal case in cryptocurrency history, and the outcome – whatever it is – will have huge ramifications for DeFi. And of course, its users.
Zac Colbert is a digital marketer by day and a freelance writer by night. He has been covering digital culture since 2007.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.