Amid tornado cash sanctions, crypto decentralization remains an enigma
While the movie ‘I, Robot’ highlighted the dilemma of trying to program ethics into robots through the ‘Three Laws’, the dystopian future of machines rebelling against humans remains a Hollywood production of fiction. However, between artificial intelligence and now programmable smart contracts on a blockchain, it seems that the future of how we use our morality and legal certainty in a world of code and machines is suddenly here.
Despite the popularity of Terminator, I, Robot or any other science fiction film that takes a stab at what might happen to humanity, we are still woefully unprepared for a dilemma with our rights to privacy in a world of digital money versus the potential for future catastrophic events to be funded through the same “privacy enhancing” tools.
The Tornado Cash website is displayed on a laptop and smartphone screen hosted in London, UK, at … [+]
No matter how one imagines the future, the present puts us to the test, like a smart contract on the ether
Ari Redbord, Head of Legal and Government Affairs at TRM Labs interviewed me to help dissect the issue. Redbord confirmed the complexity of what we saw unfold last week. “And I think Tornado Cash is particularly complicated because it’s really OFAC’s first action against a cryptocurrency business of this size, but also a cryptocurrency business that touches so much legitimate activity. Right?” said Redbord. Having served as a senior advisor to the Under Secretary for Terrorism and Financial Intelligence at the US Treasury Department, he further pointed out that “…regulators like Treasury are saying, look, we’re not banning the technology obviously, but what we’re doing here and saying that if you’re a service that allows North Korea and other cybercriminal elements to launder billions of dollars in stolen revenue, then you’re going to be a target for sanctions.”
I also interviewed Kathy Kraninger, vice president of regulatory affairs at Solidus Labs and former director of the Consumer Financial Protection Bureau. Kraninger broke down the paradigm from the perspective of the sanctions list that OFAC maintains. “The sanctions list is an identity-based concept. You have a person in the real world that you’re trying to block from accessing the illegal funds that they obtained through horrific means,” Kraninger said.
Perfectly usable for topics such as software development, IT support or hacking and cybercrime.
Beyond the immediate threat of how do we ensure a “tool” doesn’t cause a national security crisis, Kraninger highlighted the issues surrounding consumer protection for anyone who might have their wallet “dusted” or sent cryptocurrency from Tornado Cash without asking. “The need to stop the illegal activity is there, but the opportunity again for people who aren’t Jimmy Fallon or Brian Armstrong to prove the negative that they weren’t involved at all where their wallets got dusted … gives all kinds of challenging implications in this space,” stated Kraninger.
Kraninger highlighted the complications associated with cryptocurrency and sanctions enforcement, in that “… people who are clearly caught in the crossfire of this thing that should not be associated with sanctions lists at all and then trying to figure out how to really separate it out on a smart way is something they also have to communicate about.”
In the words of Winston Churchill, “… enigma, wrapped in a mystery, inside an enigma,” by Tornado Cash has clearly sent shockwaves through the ecosystem about how to interpret what behavior for computer scientists could put them in conflict with the law. Redbord declared: “Is it complicated by the kind of decentralized nature in that this is software, not necessarily an entity or an individual? Absolutely.” Kraninger said, “It becomes challenging when you don’t have a real identity or a real intermediary in a system that you can actually put your hands on … software and protocols and wallets that you can create on your own with software.”
Redbord described more obvious cases where sanctions are used as he describes it, “darknet market advertising, such as mixing services, such as Helix and Bitcoin
So while many fear we may experience further signals from regulators that could create a chilling event for creativity and exploration, Redbord noted some light that may be at the end of the tunnel in all of this. “I think maybe one kind of overarching theme is that there’s a technology solution to all of this. It doesn’t have to result in over-regulation. Because look, if you don’t trust an exchange because you think it’s going to be hacked, or you you’re not going to put your money into a defi protocol, because you think it might get stolen, or you’re not going to put your money into crypto. Then nothing works, right? This new financial system that we’re building together, only works if there’s a layer of trust, and I think we’re kind of helping to build that layer of trust by providing tools to stop illegal actors from taking advantage of that.”
Kraninger described the work at Solidus Labs focused on, “Understanding this ecosystem and building market monitoring solutions into a full compliance suite of off-chain capabilities for fiat and crypto and integration with blockchain analytics companies.” Regarding Redbord and his role in TRM, he stated, “…from a TRM standpoint, look, our job is to make sure our clients have the tools they need to comply with sanctions…We want to make sure our clients have the necessary tools to reduce the risk of exposure to tornado cash going forward.”
Hopefully, companies like Solidus Labs and TRM Labs can help create a compliance program that will satisfy the authorities while allowing cryptocurrency developers and programmers to still have the sense of freedom that is essential to developing these decentralized offerings. In the meantime, it should be a priority for policymakers to assess and perhaps reassess what an effective and fair sanctions regime looks like in a landscape of digital assets.
Disclosure: I have no vested interest in Solidus Labs or TRM Labs.
