On September 8, Coinbase announced it was funding a lawsuit against the US Treasury Department. The cryptocurrency exchange is funding a lawsuit by six people challenging sanctions against Tornado Cash. And on Sept. 9, Securities and Exchange Commission (SEC) Chairman Gary Gensler announced that he is working hard with Congress to create legislation to tighten cryptocurrency regulations.
But these two stories are not mutually exclusive. The sequence of events proves that governments are reactive rather than proactive when it comes to decentralized finance (DeFi).
Tornado Cash was sanctioned by the Office of Foreign Assets Control (OFAC) back in August. OFAC claimed the smart contract mixer has helped launder more than $7 billion worth of cryptocurrencies since its inception in 2019, including over $455 million stolen by North Korea-affiliated hacking group Lazarus Group .
Coinbase CEO Brian Armstrong said in a statement that Treasury had gone too far and “took the unprecedented step of sanctioning an entire technology rather than specific individuals.” Coinbase not only claimed that the sanctions exceeded the department’s authority, but also argued:
- remove privacy and security for crypto users;
- harming innocent people; and
- suppress innovation.
The next day, Gensler stepped up his push for tighter regulation of the DeFi market, claiming crypto businesses wouldn’t thrive without it. “Nothing about the crypto markets is inconsistent with securities laws. Investor protection is just as relevant, regardless of the underlying technology.”
Related: The US Treasury Department clarifies that Tornado Cash’s disclosure of its code does not violate sanctions
His choice of words such as “regardless of the underlying technologies” not only betrays his lack of understanding of crypto and blockchain technology, but his speech sparked an outcry in the Web3 community, with many claiming that government regulation is a wolf in sheep’s clothing.
Jake Chervinksy, an attorney and head of policy at the Blockchain Association, tweeted in response, “Crypto is a novel and unique technology: How it should be regulated is an important issue for Congress (not the SEC chairman) to decide.” .”
Chairman Gensler says most digital assets are securities. Decades of precedent say otherwise.
Regardless, crypto is a novel and unique technology: how it should be regulated is a key issue for Congress (not the SEC chair) to decide.
My opinion on WSJ: https://t.co/E7kql6Vohb
— Jake Chervinsky (@jchervinsky) September 8, 2022
The security legislation is worrying enough. But the tornado cash sanctions set an alarming benchmark for anyone involved with digital assets. Not only is blockchain technology and cryptography constantly changing—what is secure now may not be secure in the near future and almost certainly won’t be in the next year—but there are a multitude of legitimate uses for blockchain technology.
DeFi is all about privacy. The hint is in the name – decentralized finance. Mixers like Tornado Cash further protect their users’ privacy by mixing users’ deposits and withdrawals into liquidity pools, hiding their addresses, and protecting their identities. Users want to protect the privacy of their transactions for a number of legitimate reasons.
In this case, one of the plaintiffs used the mixer to anonymously donate funds to Ukraine. Another was an early adopter of crypto and now has a significant following on social media, with his ENS public name linked to his Twitter account. He used the smart contract to protect his security during the transaction. Now their assets are trapped in Tornado Cash.
A person’s finances comprise some of their most sensitive personal information. And law-abiding citizens have the right to keep this private. But that very privacy will be undermined by the kind of regulation recently proposed by Gensler, the SEC, and other governments around the world.
Related: Coinbase-backed crypto investors are suing the US Treasury over tornado cash sanctions
As is the case with these sanctions, the arrest of people using services for acts that are lawful and even benevolent, not to mention the imprisonment of developers for writing open-source code that was not available at the time of creation, feels was illegal, like Orwellian dystopia.
Treasury Department officials have since backed down, clarifying in guidance that “interacting with open source code, even in a manner that does not involve a prohibited transaction with Tornado Cash, is not prohibited.” The guide adds that copying the protocol’s code, posting the code, and visiting the site are allowed.
While not officially related, the timing and similarities between the two stories are revealing. Comparing regulation to traffic control, Gensler said, “Detroit wouldn’t have taken off without traffic lights and cops on the beat.” Using an analogy to freeways and robberies, Armstrong said, “Sanctioning open source software is like closing down a freeway permanently.” because robbers used them to flee a crime scene.” And he’s not wrong.
How many talented developers are now being prevented from writing groundbreaking code that could not only innovate industries, but help people around the world? A small number of bad actors should not impede the progress of a technology with such great potential to revolutionize sectors even beyond finance.
The Coinbase lawsuit is a pivotal case in cryptocurrency history, and whatever the outcome, it will have a huge impact on DeFi. And of course its users.
Zac Colbert is a digital marketer by day and a freelance writer by night. He has been reporting on digital culture since 2007.
This article is for general informational purposes and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.