Tornado Cash Blocking Sanctioned Addresses Shows Privacy Is a Myth

The announcement from Tornado Cash that it has started to block addresses sanctioned by the U.S. Office of Foreign Assets Control (OFAC) likely indicates the direction that the cryptocurrency industry is taking in relation to regulation throughout the world.

The Ethereum-based mixing service revealed on April 15 that it leverages an oracle created by bqlockchain data company Chainalysis to access the list of sanctions.

The list includes wallet addresses controlled by Lazarus, the North Korean-backed hacker group accused by the FBI of stealing $620 million from Axie Infinity’s Ronin Network bridge, as well as from several Russian individuals and a Russian ransomware group.

“Maintaining financial privacy is essential to preserving our freedom, however, it should not come at the cost of non-compliance,” tweeted Tornado Cash.

Financial freedom under threat

Criticism of Tornado Cash, a tool used by crypto investors to obscure their transactions, was swift. Privacy die-hards pointed to the contradiction in that some of the mixer’s strongest traits have always been privacy and autonomy.

“[Financial freedom] should absolutely come at the cost of non-compliance,” said Bruno Skvorc, founder of non-fungible token (NFT) outfit RMRK. “The only way ahead is maximum disobedience and this is a truly cowardly move.”

For governments, cryptocurrency is becoming too mainstream to ignore and too chaotic to neglect. Across the world, government agencies are targeting crypto investors not only with taxes but mandatory registration and full disclosure rules.

State regulation increasingly appears to be the price the crypto community will have to pay for assimilation into the mainstream economy. This raises existential questions about the direction of the industry, in particular, whether decentralization as a tool for resisting censorship is a myth.

“Centralized and licensed crypto platforms will always be the reference point for the kind of balance this new industry has to exhibit to gain the trust of the government and regulators around the world,” Daniele Casamassima, CEO of banking and crypto ecosystem Pure, told Be[In]Crypto.

“The decentralization myth can be turned into a progressive reality if dApps are willing to follow directives…the question, however, lies in how many of these dApps will align with the regulatory check, as many may see it as an affront to the tenets of financial freedom,” he added.

Regulatory encroachment

Regulation is rolling out with the innocuous-sounding promise of support for innovation, but it is not clear how heavily government whims will impose upon investors and exchanges going forward.

Individuals looking to operate in an insular system, away from central bank and state oversight, are increasingly confronted with new top-down demands for the industry which include the closure of firms and freezing accounts.

Some of the regions that have weaponized lawbooks to control aspects of digital asset use include China, India, Malaysia, Australia, Japan, the EU, and the U.S.

China banned the use and trade of bitcoin (BTC) while the U.S. Securities and Exchange Commission has said in the past that it considers many crypto assets to be securities and that security laws will be applied to wallets and exchanges where necessary.

In a blog post, renowned DeFi architect Andre Cronje explained how the industry has moved on from its pioneers’ autonomous fundamentalism and is now seeking regulation and safety.

“Instead of trying to fight regulatory bodies because of crypto regulation, we should be trying to engage and educate on regulated crypto. What should a token issuance license look like? What should an exchange’s activities be expanded to?” he said.

Ethical grounds for decentralized decision-making

Cryptocurrency regulation is usually themed around money laundering and funding of terrorism. A series of heists has not helped the cause of crypto, with victims clamoring for governments to wade into the chaos in messianic garb.

Exchanges and other crypto service providers have cautiously welcomed the governmental embrace, showing a break from crypto pioneers who maintained cynic detachment from authority.

Jonathan Caras, a member of the Luna Foundation Guard governing council, told Be[In]Crypto that “we’re seeing a great example of successful decision making on decentralization with Tornado Cash.”

He said decentralization was always a spectrum that involved censorship resistance on the front end, while the other decentralization occurred at the back end. Caras believes soft-touch regulation may be relevant to bringing cryptocurrency into the mainstream.

“We mustn’t confuse whether or not decentralized decision-making can leverage centralized services such as an oracle,” he cautioned. “I think it’s pretty clear a decentralized group of decision-makers can decide there are ethical or moral boundaries that they don’t want to be responsible for, such as allowing terrorists to money launder.”

Continuing, Caras said:

“If this type of decision, however, were made behind closed doors knowing that the community rejected the idea, that would be an example of a failure of decentralization.”

Crypto gives up its envisioned autonomy

Although crypto was conceived as an anti-authority invention where unmediated business is conducted peer-to-peer, the lack of internal controls, requiring users to utilize their own discretion, has been exploited by those with criminal motives.

For example, hackers have stolen more than $1.22 billion from the decentralized finance (DeFi) market this year alone. Across the crypto universe, this all bundles into a disarming pretext for state control.

The current direction of crypto mapped by government regulators is, however, a far cry from Bitcoin founder Satoshi Nakamoto’s whitepaper, which declared:

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

Third parties are now fully immersed in the crypto ecosystem, which some industry players are coolly rationalizing as a coming-of-age phase for the digital asset economy.

As the cryptocurrency industry matures, it is becoming increasingly tangled in tax policies and institutional oversight that significantly cedes its envisioned autonomy.