POS Ethereum Will Be Censorship and OFAC Resistant Argues Eric Wall

In the wake of sanctions from the Office of Foreign Assets Control (OFAC) against Tornado Cash, crypto analyst Eric Wall has trashed the possibility of an OFAC-compliant Ethereum chain, calling the notion “dead on arrival.”

According to Wall, Ethereum may need to take punitive measures against some validators to ensure its future censorship resistance.

A big, unwelcome change

The unique punitive action taken by OFAC against Tornado Cash continues to cast ripples right across the cryptosphere. On Aug 15, non-profit organization Coin Center protested the move in a stinging rebuke that labeled the move “statutorily and constitutionally deficient.”

Ethereum founder Vitalik Buterin has also defended Tornado Cash publicly stating that he used the coin mixer to anonymously donate to Ukraine.

Analyst Eric Wall has now weighed in with his own analysis of the sanctions.

As Wall states, “one of the absolute core purposes for blockchains such as Ethereum is to provide neutrality and censorship resistance. That’s why we tolerate that the system is slow and expensive to use at times—because of these unique qualities. A threat to censorship resistance is a threat to the system’s raison d’être.”

With OFAC blacklisting Tornado Cash, the wider Ethereum network is also placed under threat. Validators on the Ethereum blockchain include Coinbase, Kraken, and Binance. It’s conceivable that for fear of repercussions, centralized organizations may not wish to sign off on any block that does not comply with OFAC, leading to a censored POS Ethereum. 

The solution for Wall would be “slashing” those validators in such an event by removing some or all of their staked tokens as a penalty. This would provide a robust defense against over-reaching government bodies.

For that reason, and for the technical problems of implementing an OFAC-compliant chain Wall says, “it doesn’t take a brilliant mind to figure out why the OFAC-chain is basically dead on arrival.”

The right of the argument would seem to be on Wall’s side. On Aug 19, Coinbase CEO Brian Armstrong said that the company would rather cease Ethereum staking than censor transactions on the network.

Do OFAC’s claims stand up to scrutiny?

The Office of Foreign Assets Control administers and enforces foreign economic sanctions. For the most part, these sanctions are leveled against countries and groups of individuals engaged in terrorism or narcotics offenses. 

Earlier this month that convention was turned on its head when OFAC sanctioned the coin mixing service Tornado Cash, sanctioning a piece of code rather than an individual or organization. 

According to a statement released by OFAC on Aug 8, Tornado Cash “has been used to launder more than $7 billion worth of virtual currency since its creation in 2019.”

This is contradicted by chain analysis firm Elliptic, which links a much lesser $1.54 billion of its total transactions to criminal activity. While this is still a sizable figure it is significantly lower than the $7 billion cited by OFAC. Elliptic states that the $7 billion figure represents the total trading volume through the protocol since its inception. 

OFAC’s $7B statement would seem to indicate an ultra-hardline stance, dismissing any and all legitimate use cases, and labeling 100% of all activity on the platform as money laundering. 

Despite this apparent failure of analysis, the body has been ramping up its efforts to better examine cryptocurrency transactions. 

In early May the agency requested that Chainalysis provide them with address clustering options, wallet explorer tools, and transaction flow mapping. Later that month the agency subscribed to Chainalysis’ Training and Support Packages including their Rumker licenses. This package includes observation and node capabilities, providing OFAC with the ability to pinpoint the location of where specific server nodes are running. 

Having acquired powerful analysis software from Chainalysis, OFAC would appear to have all the tools they require to conduct far fairer and better analysis than of late.

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.