Crypto’s Libertarianism Plunges Headfirst into Reality – The Atlantic | Jewelry Dukan

Crypto was picking up steam and governments were finally starting to behave this way. When a young writer and software engineer named Vitalik Buterin wrote an impassioned screed defending the blockchain gospel for its publication in 2013, Bitcoin MagazineCryptocurrencies were still a niche curiosity. But a series of regulations startled the burgeoning industry and threatened the kind of anti-government ethos that has always been at the heart of the project. For Buterin, the panic felt a bit excessive. Crypto, he argued, cannot really be regulated. After all, that was the crux of the new system: an Internet without masters, without intermediaries and without guard rails. “The future of crypto-libertarianism is bright,” he wrote. “Stop worrying.”

This is the promise crypto advocates have been making to consumers and politicians over the past decade as crypto blew up into a trillion dollar behemoth – and in the process Buterin, now best known as the founder of the Ethereum network is made very, very rich. (Buterin’s Ethereum Foundation did not respond to a request for comment.) Even though crypto has crept into the mainstream, the argument goes, the technology has been engineered to avoid interference from banks and governments. This is what Jesse Powell, CEO of the Kraken exchange, did for example referred to crypto networks as “censorship-resistant tracks of last resort”. And venture capital powerhouse Andreessen Horowitz, now the top backer of crypto startups, has invoked the same idea in boosting its multibillion-dollar funds.

But what might have proved true in 2013 may not be quite so true in 2022. Thanks in part to its attempts to gain mainstream recognition, crypto is now struggling against renewed government scrutiny. In recent weeks, a subtle but significant move by the Treasury Department has exposed some of the rhetorical misconceptions at the heart of the industry, suggesting that tech can get involved.

With all the talk of crypto as a nifty new alternative to a corrupt and outdated banking system, companies have now found themselves backed into a corner: either they can comply with regulations that could essentially negate the promise of the technology, or they can, of course, stay put high cost to their bottom line. And for the most part, companies seem to be taking the easy way out, damn principles. It’s a sign that crypto is growing up from its youth to build a new financial system and is instead evolving into something of a new wing of big tech. As crypto matures and integrates into the existing frameworks of American capitalism, it strays from its core ideals.

The panic began in early August when the Treasury Department decided to authorize a program called Tornado Cash, which essentially bans any person or business in the US from interacting with it in any way. Tornado Cash is a tool that renders Ethereum transactions more or less untraceable, messing up the paper trail on a notoriously transparent blockchain. It’s great for well-meaning privacy enthusiasts worried about prying eyes, but it’s also great for cleaning up dirty money: state-backed North Korean hackers reportedly used the program to steal more than half a half worth of Ethereum in April to launder billions of dollars.

Tornado Cash is not a particularly popular program, but the impact of the sanctions is far-reaching. It threatens to affect how the entire Ethereum blockchain – now the second largest crypto network after Bitcoin – works in practice. Allow me for a moment of crypto splaining: when you ask your computer to send some Ethereum to a friend, you have to wait for another computer on the network to confirm the transaction to ensure that you have enough funds to send and that it is also so is the right address. Without this approval, the money is in limbo.

For now, this is done through a process called “mining,” although Ethereum plans to replace its miners with a new, more energy-efficient system of “validators” later this month. Technically, anyone can be a validator, but since validation requires a lot of crypto on hand, it’s mostly companies that do the work, pooling customer funds and taking a portion of the profits. According to Decrypt, more than 60 percent of the validation will go through four companies. And if the computer doing the validation is owned by an American company (even if you’re not based in the US yourself), it has to comply with the sanctions, making it harder for anyone on the network to use Tornado Cash.

The end result is risking what Crypto has always wanted to avoid: censorship. As the companies behind these inspectors are penalized for violating the sanctions, the reality is that your money may be frozen by a vigilant government. It’s a small dent in the armor that defines Ethereum’s resistance to censorship, and one that doesn’t necessarily affect casual users — but the fact that the armor can be broken at all is telling. Who knows what the Treasury Department might decide next? “It reveals what was true all along,” Angela Walch, a law professor at St. Mary’s University who studies crypto, told me. “The cat is out of the bag for both regulators and the crypto sector [censorship resistance] is a kind of myth.”

American validators don’t have good options here. If they choose to comply with sanctions, they acknowledge that governments can still interfere in transactions and may allow innocent bystanders to be caught in the crossfire. Otherwise, they risk violating Treasury Department guidelines — a move that’s not particularly sustainable for a growing industry.

In practice, companies must either comply with the sanctions and give up their Don’t Tread on Me roots, or shut down their validation businesses altogether, wasting vast amounts of money in the process. “This is where the rubber hits the road for crypto companies,” Walch said. “Your talk about this being a democratizing force and ‘neutrality matters’ and ‘everyone should have the opportunity to act freely’ – okay, are you going to follow the law, or are you going to follow the supposed ethos of the place? We’re getting to the point where you won’t have it either way.”

No one should be surprised that denizens of crypto Twitter — that twisted artery through which all blockchain-related discussions seem to flow —are lobbyists for the latter option. For believers, choosing how to respond to these sanctions is almost a moral issue. If you’re willing to comply with the tornado cash sanction, the thought goes, you might never have really cared about what made blockchain so special from the start. A crypto YouTuber suggested that if Ethereum validators capitulate to the sanctions, the entire system would be “for beta males.”

Some crypto leaders are not backing down. Buterin, more of a technologist than an entrepreneur, is on record he would choose to penalize validators who comply with the sanctions. Brian Armstrong, CEO of Coinbase, arguably the most influential executive in the American crypto sphere, has said the same about his company’s validators; Yesterday, the exchange announced that it is funding a lawsuit against the US Treasury over the sanctions. When Ethereum updates later this month, Coinbase will control an estimated 15 percent of the market for the network’s validation process, making it one of the most powerful single players in the system. Closing down part of a company poised to make big profits for Coinbase, especially after a particularly poor quarter, would be borderline catastrophic. (A Coinbase spokesperson directed me to a webinar it was hosting to discuss the implications of the sanctions, but declined to comment further.)

But by and large, most companies have remained silent on this question so far. For some, the silence could mean real confusion about exactly how to comply with the sanctions. For others, though, it may just be doom: The industry seems more intent on cementing its place in the American financial system than taking an ideological stand at the expense of profit, and an official statement is possible that would only incite the community . Last week, a spokesman for Kraken, which runs an Ethereum validation business alongside its exchange, said in an email that the company is “carefully monitoring discussion of the potential impact of tornado cash sanctions on validators,” but refrained from doing so , to elaborate on plans to comply with the new sanctions. However, a 2018 mission statement by Jesse Powell might give you a clue as to where the company is headed: He wrote that its “ideological motivation” to build a world-class exchange rested entirely on “collaborating with regulators.” Lido Finance, another prominent source for validators, did not respond to multiple requests for comment.

That companies are finally addressing these issues is a sign that the industry is maturing, for better or for worse. Crypto was originally conceived as an alternative to traditional finance to bypass the big banks. But what happens when the new system grows into the old? When Buterin wrote his blog post a decade ago, a single bitcoin cost $120. In the heart of last year’s surge, this price hit $69,000. In 2022, venture capital firms and investment banks are pouring billions into the idea that crypto will play some role in the future of global finance. Blackrock has a private Bitcoin trust for its clients, and JPMorgan Chase, Morgan Stanley, and Goldman Sachs all have dedicated crypto divisions.

In this new era, companies must make a choice: accept the reality of regulation and continue to grow their business, or find a way to circumvent the new regulations entirely. At least they have to finally choose a side.

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