Shots Fired: US Treasury Sanctions Crypto Mixer "Tornado Cash"

What Tornado Cash does, the philosophical framework underpinning my problem with this decision, and why I think this is actually a really big deal.

This morning the US Treasury Department, through OFAC (Office of Foreign Assets Control), sanctioned the Tornado Cash mixer and numerous Ethereum addresses that have used the mixer either on the sending or receiving end. First, what is a mixer? A mixer is something that is used to obfuscate the source of funds. The problem with Ethereum and most public blockchain networks (including Bitcoin) is the lack of privacy. This is where mixers like Tornado Cash come in.

Here’s an example of the problem; let’s say “John” figures out the Ethereum wallet address of his friend “Tony.” John can then find the complete transaction history of Tony’s on-chain activity. He can see exactly what assets Tony has on-chain whether Tony wants John to know what he has or not. Perhaps Tony doesn’t want John to know what NFTs he owns, how much ETH he has, or which projects he supports. If Tony wants to hide what he’s doing or what he has, he can use a mixer like Tornado Cash as an intermediary to gain some level of privacy.

The obvious kneejerk criticism of mixers is they enable crypto-based money laundering. This is a real problem and Tornado Cash has certainly been used in this way by hackers to clean stolen funds. Still, sanctioning Tornado Cash is preposterous. From anonymous donations to battling malicious data mining, there are totally justifiable reasons to use a crypto mixer for financial privacy.

Furthermore, the sanctions of all of the wallet addresses that have been used in the mixer are heavy handed and show that either the Treasury doesn’t understand what it is regulating or it simply DGAF; neither of which are good. Hypothetically, if the US Treasury has control of an Ethereum address, the department could be sent funds through the mixer unwillingly and would theoretically be in violation of it’s own sanctions without doing anything. This is because users can be transferred funds and assets on Ethereum without initiating or accepting anything.

Ruining It For Everyone

If bad actors can use something for bad purposes, should good actors not be allowed to use that same thing for legitimate purposes?

To me, that is the fundamental question at play here and I really believe it is that simple. Not much gray area on this one. If you like, you can apply that same framework to other things. Knives can be used to stab people to death. They’re perfectly legal because we use them to cook and cut food. The thought of outlawing knifes would be ridiculous. How about cars? Again, they can be instruments of murder but they’re generally used for safe and legal human travel.

What about the internet? All sorts of illegal activities happen online; cyber crime, grandma scams, drug deals, and underage pornography. Maybe we should shut the internet down too. Straw man arguments? No. Let’s limit the hypotheticals to just money laundering instruments. Cash! More criminal activity happens with cash than crypto, by a significant margin actually. Maybe we should ban cash? Of course not. Cash also allows the unbanked to participate in society. Cash offers privacy for law abiding citizens in free value exchange.

Privacy is normal.

I, you, we, are not criminals simply because we don’t want to share every crypto transaction we make with an entire planet of block explorer sleuths. Privacy is essential. To strip it away is to destroy the human experience.

This is Not Over

This is just the beginning. While I’d love to tell you privacy coins like Zcash are immune from this type of criminalization, that would be a lie. It is almost certainly more dubious in reality to try to track shielded transactions and locate every ZEC node on planet earth to force a network shutdown, but there is nothing stopping the Treasury Department from simply criminalizing the usage of Zcash or any cryptocurrency for that matter.

This is a legitimate risk and crypto as an industry is now battling the regulators on numerous different fronts. Gary Gensler, Lord of the SEC, wants to call everything a security. There’s a bipartisan bill aiming to put most of these assets under the watchful eye of the CFTC - I actually think that would be a decent outcome. Now, we have the Treasury Department quite literally sanctioning open source code.

Unfortunately, I think the war is just getting started. I mean this genuinely; simply owning certain cryptocurrencies is starting to carry more than just financial risk. Just by using some of these privacy coins and protocols we could theoretically be considered criminals in the future. If you don’t have the stomach for this, you might consider getting out now.

But if you’re curious how ZEC reacted to today’s news… it didn’t go down.

Disclosure: As I have said numerous times, I’m not a financial advisor. I share what I personally do and why I do it. None of this is investment advice. All financial markets carry various risks and crypto is no different, even total loss of funds is possible. That is why you should never bet money you can’t afford to lose in this space. I am personally long Zcash. I have never used Tornado Cash because I believe privacy is best achieved at the base layer rather than through dApp interactions.