Recently, Tornado Cash, an open-source protocol built on the blockchain, has been sanctioned in the US. Moreover, a Tornado Cash developer has been detained in the Netherlands for their role in building the protocol.
Tornado Cash is a protocol that prevents traceability and protects users' crypto holdings' anonymity.
The sanctioning has been controversial because even though the protocol is used to launder money, it is also a necessary privacy layer for users to move funds. This is because, unlike cash or a bank account, the blockchain is transparent and traceable, which can create legitimate safety concerns for users. Therefore, many users prefer to anonymise their wealth through Tornado Cash or other privacy protocols.
Why Was Tornado Cash Sanctioned?
The US government organisation Office for Foreign Assets Control (OFAC) sanctioned Tornado Cash for companies operating in the US due to North Korea utilising the protocol for cybercrime.
The ruling has been widely protested, as many (including Coinbase) claim that the protocol is code and not a company or individual. This has angered many in the community due to the landmark case of Bernstein v. Department of Justice. The case found code to be equal to speech; therefore, sanctioning code violates the United States' first amendment.
Who Is Effected By The Sanctions?
For now, OFAC is focused on controlling centralised organisations such as Binance, Coinbase, and front-end Defi applications. The enforcement agency is not currently pursuing protocol-level applications. However, some mining and staking operators question whether they are violating the sanctions by validating blocks that include Tornado Cash transactions.
Currently, OFAC has not attempted to prevent self-custody hardware wallet providers from allowing Tornado Cash interaction, but it would be an unprecedented move if they did.
Are Regulators Looking At Other Privacy Coins?
The EU is contemplating a ban on privacy coins such as Monero and Zcash. The reason for the ban is to fall in line with anti-money laundering rules.
The ban would be similar to the Tornado Cash sanctions in the US in that it would effect centralised organisations and front-end applications. However, similarly to the OFAC sanctions, it would be almost impossible to implement and enforce at the protocol level.
A core value of cryptocurrency technology is censorship resistance. At the protocol level, it is almost impossible for governments to ban a particular transaction type. However, control over centralised organisations operating in the cryptocurrency community will only increase.
Therefore, new laws and regulations will continue to enter the industry. Although, theoretically, blockchain networks are decentralised, the validators are still subject to the ruling of their government. This can be seen with the largest Ethereum validator, Ethermine, already not accepting blocks including Tornado Cash transactions.
The outcome of the banning of privacy coins saga is yet to be seen, but since the ban, hackers have continued to use the Tornado Cash network to launder money
