Tornado Crash

Opening a Pandora's Box

The following views were put together yesterday (and a bit today) given the recent Tornado Cash saga. It coincided with being in the studio, so it made sense to also make a mini film on it which you can watch here (and then read below for more details):

With news of OFAC sanctions on crypto mixer, Tornado Cash, this is a massive shot across the bow for the ship that is DeFi. This has implications not just for the US but also globally.

The fact that Maker has even considered putting in an emergency shutdown shows how significant this event is for the ecosystem. This comes on the back of Circle, the provider of the USDC stablecoin, giving into OFAC demands and blacklisting Ethereum addresses owned by Tornado Cash. With USDC being a major component of Maker’s DAI stablecoin (along with Ethereum, wrapped BTC, other crypto), it’s a definite threat to the stabilising mechanism of DAI.

Maker has withstood the trials and tribulations of DeFi over many years, up to and including this current bear market. It’s proven resilient to issues, and this will no doubt be another test for it to overcome

Taking a 50,000 ft view of this situation, on the one hand, we can see that an easier task is to sanction but perhaps better, for regulators and governments, is to understand the possibilities of blockchain tech and what it can do to not just improve efficiency across industries, but also improve how enforcement and the mechanisms of running a government works. Take, for example, a charity organisation. If it were able to take on crypto donations, trace the use of that, provide NFT receipts to donators and have tie-ins with tax agencies to provide straight-through processing of those components of a tax return, this is a win-win for users and regulators.

Additionally, detractors of crypto will use this as a headline to highlight scams in this space. We point all those to the annual analysis of Chainalaysis and their Crypto Crime report. This has shown that less than 1% of volume comes from illicit activities and this has been going down (0.62% in 2020 and 0.15% in 2021 - see https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/). There is much more good than evil in this space and even with an open source protocol like Tornado Cash, not all use cases were for illicit activity.

I’m not the only one that takes this view either. Guy, from the Coin Bureau, had this video where he mentions the disparity between real-world money laundering and that which we see highlighted by these OFAC sanctions (and you can see this at 6:39 of the video below). Night and day really.

Additionally, in our Discord chat, we were abuzz with news and views of the activity going on ranging from the first flags of this by our members overseas (thanks Nor) to discussions around whether code should be considered freedom of speech (I think we will be looking at freedom to code one day).

All this makes for another interesting week in the web3/blockchain space but overall, innovation will keep marching forward.