On September 8, Coinbase announced that it was funding a lawsuit against the US Treasury Department. The cryptocurrency exchange is funding a lawsuit filed by six people challenging the sanctions on Tornado Cash. And on September 9, Securities and Exchange Commission (SEC) Chairman Gary Gensler announced that he was working hard with Congress to create legislation to increase cryptocurrency regulations.
But these two stories are not mutually exclusive. The sequence of events shows that governments are purely reactive rather than proactive when it comes to decentralized finance (DeFi).
Tornado Cash was sanctioned by the Office of Foreign Assets Control (OFAC) in August. OFAC claimed that the smart contract mixer has helped launder more than $7 billion in cryptocurrency since its inception in 2019, including more than $455 million stolen by hackers linked to North Korea Lazarus Group.
Coinbase CEO Brian Armstrong said in a statement that the Treasury went too far, taking “the unprecedented step of sanctioning an entire technology rather than specific individuals.” In addition to claiming the penalties exceeded the department’s authority, Coinbase argued the measures:
- Eliminate crypto user privacy and security;
- Harm innocent people; i
- Stifle innovation.
The next day, Gensler doubled down on his push for tougher regulation of the DeFi market, claiming that crypto companies would not thrive without it. “Nothing in the crypto markets is inconsistent with securities laws. Investor protection is just as relevant, regardless of the underlying technologies.”
Related: US Treasury clarifies that release of Tornado Cash 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 from the Web3 community, with many claiming that regulation of the government is a wolf in sheep’s clothing.
Jake Chervinksy, attorney and head of policy at the Blockchain Association, tweeted in response: “Crypto is a new and unique technology – how it should be regulated is an important matter for Congress (not the SEC Chair) to decide “.
Chairman Gensler says most digital assets are securities. Decades of legal precedent say otherwise.
Regardless, cryptography is a new and unique technology: how it should be regulated is an important matter for Congress (not the SEC chair) to decide.
My take on WSJ: https://t.co/E7kql6Vohb
— Jake Chervinsky (@jchervinsky) September 8, 2022
Security legislation is worrying enough. But the Tornado Cash penalties set an alarming benchmark for anyone involved in digital assets. Not only are blockchain technology and cryptography constantly changing (what’s secure now may not be secure in the near future and almost certainly won’t be next year), but there are countless legitimate applications for blockchain technology.
DeFi is all about privacy. The clue 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 safeguarding 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 donate funds to Ukraine anonymously. Another was an early adopter of cryptography and now has a significant following on social media, with his public name ENS linked to his Twitter account. It used the smart contract to protect its security during transactions. Now their assets are trapped in Tornado Cash.
A person’s finances include some of their most sensitive personal data. And law abiding citizens have the right to keep that private. But it is this very privacy that will be eroded by the kind of regulation recently proposed by Gensler, the SEC and other governments around the world.
Related: Coinbase-Backed Crypto Investors Sue US Treasury Department After Tornado Cash Sanctions
As is the case with these penalties, arresting people for using services for lawful and even benevolent acts, not to mention blocking developers for writing open source code that wasn’t illegal at the time of creation, feels like Orwellian levels of dystopian. .
Treasury officials have since backtracked, clarifying in guidance that it is, in fact, “not prohibited to interact with the open source code itself, in a manner that does not involve a prohibited transaction with Tornado Cash.” The guide adds that copying the protocol code, publishing it and visiting the website is allowed.
Although not officially related, the timing and similarities between the two stories are telling. Gensler likened regulation to traffic control, saying, “Detroit wouldn’t have taken off without some traffic lights and cops on the beat.” Armstrong used an analogy of roads and robberies, saying, “Sanctioning open source software is like permanently closing a road because thieves used it to flee the scene of a crime.” And he’s not wrong.
How many talented developers will now be deterred from writing game-changing code that can not only innovate industries, but help people around the world? A small number of bad actors should not hinder the progress of a technology with such great potential to revolutionize sectors beyond finance.
The Coinbase lawsuit is a seminal case in cryptocurrency history, and the outcome, whatever it is, will have huge ramifications for DeFi. And, of course, its users.
Zac Colbert he’s a digital marketer by day and a freelance writer by night. Covering digital culture since 2007.
This article is for general information purposes and is not intended and should not be taken 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.
