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1. The Treasury Department’s Crackdown On Tornado Cash Sets A Problematic Precedent For Cryptocurrency Privacy Controls

1. The Treasury Department’s Crackdown On Tornado Cash Sets A Problematic Precedent For Cryptocurrency Privacy Controls

Last week, the Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, a token mixing service that allows for privacy-preserving transactions on the Ethereum blockchain. OFAC noted that criminal organizations like North Korea’s Lazarus Group have leveraged the service for money laundering purposes. As a result, it added Tornado Cash’s website and 44 associated Ethereum addresses to its Specially Designated Nationals and Blocked Persons List (SDN). As required by US law, node operators Infura and Alchemy blocked access to Tornado Cash while GitHub took down the code repository, blocking the accounts of its contributors, and Circle froze the USDC in Tornado Cash wallets.

Importantly, Tornado Cash is a smart contract––a piece of open-source software––for crypto users seeking privacy. In other words, for the first time, OFAC has sanctioned code as the “throat to choke” in addressing privacy-related concerns, a decision with massive legal and financial implications for developers and downstream recipients of tokens that have touched the Tornado Cash service.

On-chain derivatives exchange, dYdX, blocked addresses that had touched Tornado Cash, shocking users who had no idea that their ETH had anything to do with it. Meanwhile, Dutch authorities arrested Alexey Pertsev, a Tornado Cash developer––and another “throat to choke”––in Amsterdam, claiming that his software contribution to this open-source code facilitated money laundering.

Sanctioning Tornado Cash to disrupt foreign hacking groups, OFAC seems to have used a blunt instrument to set a dangerous precedent that could limit privacy rights on the internet. Others in the crypto community agree. In our view, the sanctions underscore the importance of deep decentralization to preserve crypto’s independence in the long term.

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