How Tornado Cash Sanctions Affect Bitcoin – Bitcoin Magazine

by James · August 10, 2022

This is a transcribed excerpt of the “Bitcoin Magazine Podcast”, hosted by P and Q. In this episode, they are joined by Dylan LeClair and Sam Rule to talk about the recent Tornado Cash sanctions from the US Treasury Department.

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Dylan LeClair: Tornado cash is an open source, Ethereum hybrid wallet, like Samourai Wallet or Wasabi (which has already started to become OFAC compliant and blacklist certain addresses). These are just ultimately a collaborative bitcoin transaction. People call it a coin mixing solution or whatever they try to call it to try to criminalize it. It’s just a bitcoin transaction; it’s just a cooperative consumption. It’s just information. You can argue that it is against free speech in a way, but the state will not accept that.

It’s just not a good precedent. The founder, who is just a software developer, is potentially canceled because he created something that the US government didn’t like, and they blamed Korea.

It was pretty ridiculous, but just a pretty important day, overall, and not good for the privacy movement overall, but we’ve known it was coming. We knew it was only a matter of time.

Q: I want to play devil’s advocate. I’m not asking this question because I believe any action is justified, I’m just a vehicle to share another idea. Let’s ignore Tornado Cash, but let’s say this actually happened to Do Kwon or Mashinsky. Would your feelings be different?

LeClair: Let’s distinguish between a fraud, Alex Masinsky, and think what you will about whether Do Kwon was building something for real or knew it was all a Ponzi all along. I’m not going to call it here. But compared to what Alex Masinsky and Celsius did, it was fraudulent, so it’s different than someone building software. It is non-custodial, like Tornado Cash is a non-custodial Ethereum mixer. You submit a transaction — I don’t even know the exact technical details as well as I do with bitcoin and mixing — but you submit eth and there’s a smart contract that executes and mixes it up, and you can’t tell what’s input and what is the output is the basis for it. Sorry if I compiled the answer a bit. The founder or creator of this software, Roman Semenov, does not actually touch ethics. There is this really small eth versus bitcoin flame war going on where all this hype around the merger and potentially the .eth Twitter cult will go against the Bitcoin Maximalist Twitter cult. It’s all pretty silly and I think it misses the bigger point that a hug is coming.

Whether Ethereum has its advantages or is riding on the back of Bitcoin is anyone’s judge. I’m probably more aligned with the Bitcoin Maximalist point of view. Screaming that it’s all a scam for the past decade hasn’t really served anyone well or protected anyone. People are still going for scams, so maybe we Bitcoiners should tweak our message a bit. Although I’m pretty bearish on all the other altcoins against Bitcoin over the next year, five years, 10 years.

I think Ethereum is hugely overvalued at 50% of bitcoin’s market cap, but I think calling for more regulation in labeling Ethereum as a security is probably the wrong way to go. To keep bringing it back here.

Sam Rule: Going back to your question, it’s justified if it was a fraudulent activity or Mashinsky or something like that that they shut down. I guess it doesn’t matter. If you do it for one, you will constantly find the gray area to do it more and more. It just comes back to the point that it’s just two different systems completely and always will be because stablecoins are going to be bigger centralized issuers, no matter what chain, whether it’s Tron or Ethereum they’re on, they’re going to run into those the problems. They are still operating. Stablecoins are by definition a blockchain, dollar version of the financial system we have today.

I don’t think it really matters in terms of punishment, whether it’s illegal activity or not. Now, when you think in Bitcoin terms and the innovation, it’s meant to be that you’re going to have so many conversations. If Bitcoin is successful over the years and has so many problems trying to shut down rails for all kinds of reasons from the system that the US has had or where the western world has really had very strong financial control over it. They’re going to lose that power, really. They won’t give it up like that.

Again, it’s just like one, probably very small example, if I think it was North Korean money laundering, that’s going to come up and probably a lot of people are going to fight and say it’s very prudent to shut it down. It just goes back to the censorship-resistant properties of all of this and what is really censorship-resistant, and as Bitcoin grows and it scales in these situations, will that prove that it’s really censorship-resistant? To me, that’s probably the biggest risk: Between blacklisting addresses and trying to shut down some kind of circular economy, how much influence over governments and businesses will they be able to do? How much will the tools on Bitcoin withstand it?

LeClair: I think on this note, it’s quite interesting. All the macro craziness we’ve seen in the last year, I’m not just talking about economic, but the geopolitical tension that is increasingly building with the US and China and all the sanctioning of sovereign reserves. We are a long way from bitcoin being anything from a shortfall asset, a 24/7/365 inverse VIX. The S&P ticks down or up, bitcoin is beta on that, and it’s just this reflection of the liquidity tied up and all the extra speculation sloshing around.

If we reach this point with bitcoin at $500,000 and it’s equivalent to gold, even bigger than that, bitcoin will be liquid enough. It will be the enemy of money, but not at the level of drug dealers and petty speculators, as it was in 2011 and it is now in 2022, but however long it takes, it will be liquid enough for the resistance countries to hold it. in its reserves as a treasury [asset].

Bitcoin mining and the reality of the game theory of digital money and “not your keys, not your coins” at the nation-state level. It’s like it’s not your system. And ultimately, I think the game theory of bitcoin in the long run is that people, institutions, and ultimately sovereigns will choose something where they have the rules in their favor. Whether it’s absolute scarcity, rising production costs and you get to decide that there are no more than 21 million coins by running your own software. The bet on bitcoin is the bet that people will converge on it because there is no other alternative. You cannot use USDC and you cannot use USTs (US Treasuries) if you are Russia or China.

So what if China invades Taiwan and I’m not going to pretend and squirm here like I’m a geopolitical expert and know what Xi Jinping is going to do with Taiwan. I don’t know, but I do know that the trend of increasing hostility between the largest institutions and sovereigns on the planet is going to increase and the confidence in this international monetary order that has been built up over the last 80 years since Bretton woods … and after 1971 it became the order free floating fiat currencies. It is this experiment; we are really only 51 years into it. What happens when all this boils to a head and massive competitive basement and wear and tear of this international monetary order, which we no doubt began to see in the last two years at an increasing pace and probably in the next three to five? Bitcoin is probably there.

I am quite short-term bearish. I think stocks have a leg down and that we still haven’t seen the biggest volatility event in this economic meltdown, but in terms of censorship resistance, I think one of the biggest bull issues is to think about the geopolitical game theory, and look at why gold itself failed as global money and global money between sovereigns at the largest level. Why it failed and why that trust, that connection, that relationship failed, and then look at Bitcoin or look at Ethereum, look at USDC and evaluate every asset on the planet in terms of what will fill this kind of need: this global need for a neutral reserve assets.