Did the US government declare war on crypto?

Monday, the US Treasury Department added Ethereum coin mixer Tornado Cashand a number of addresses linked to the service, to the Specially Designated Nationals list – a classification usually reserved for terrorist organizations and enemy nations.

In doing so, the Treasury effectively banned all Americans from using Tornado Cash, a tool that allows users to hide the public traces of their cryptocurrency transactions by mixing many such transactions together. The Tornado Cash website has been unattainable for three days.

The Treasury defended the move by citing a number of cases where the service has been used to launder money by bad actors, including North Korean state-backed hacking organizations The Lazarus Groupand the people who stole $7.8 million last week Nomad Bridge hack.

In the days since the announcement, some crypto leaders have decried the ban not just as unfair, but as an illegal and existential threat to users’ privacy — perhaps the most sacred tenet of an industry shaped since its earliest days by libertarian, anti-government principles.

Experts and industry leaders who spoke to Decrypt divided opinions on the legality and appropriateness of the ban.

Most agreed that the move may have just sparked a marked escalation in hostilities between crypto’s embittered privacy advocates and the federal government, a development that could shape the space for years to come.

Tornado Cash Ban: Good, Bad or Neutral?

Fundamental to the legal and ethical issues surrounding Tornado Cash’s ban is the service’s status as a smart contract. Like many decentralized finance (DeFi) protocols, Tornado Cash is an automated program that does not require any staff to maintain or monitor its function.

To some, the fact that no humans are involved in Tornado Cash’s day-to-day operations indicates that at the end of the day the service is code, with no mission or underlying intent.

“Tornado Cash is a tool, like any other, that can be used for good or bad,” Ethereum core developer Preston Van Loon previously told Decrypt.

Ameen Soleimani, one of Tornado Cash’s co-founders, has repeatedly stated that the service was never designed to cater to criminal money launderers, but instead built for retail crypto users who want to protect the privacy of their financial data.

“We did not aim to have it for money laundering, or any such intent,” Soleimani said in a Twitter Spaces yesterday. “It was pretty harmless, what we tried to use it for… just to protect ourselves.”

For many advocates of Tornado Cash, the fact that the service has since been manipulated by some errant users is no reflection on the underlying tool itself. So the thinking goes, “coin mixers don’t launder money, launderers launder money.”

It is in this respect – going after the technology, not the individuals who implemented it (no people were blacklisted by the Treasury Department, only websites and wallet addresses) – that some see the Tornado Cash ban as different from all other crypto regulations that have come before it.

“This is the first time I’ve ever seen a piece of software shut down,” said Matthew Green, a professor of computer science at Johns Hopkins University. Decrypt. “And it’s kind of unique.”

Others see the situation as less exceptional.

“If it looks like a business and walks like a business and quacks like a business, you can regulate it like a business,” University of Kentucky law professor Brian Fyre told Decrypt. “And it doesn’t matter what you call it, or how you characterize it.”

For Fyre, if Tornado Cash performs a service for a fee, even if no one is there to answer the phone, that is a business, and not First Amendment-protected speech, as someone has proposed.

And while Tornado Cash’s creators don’t authorize every (or any) transaction their site processes, Fyre believes the law is clear that they’re still on the hook if illegal activity makes up a significant amount of the site’s traffic.

“The court is going to see that a significant portion of your service’s traffic is for illegal purposes, and you know it, and you’ve done nothing to try to stop it,” Fyre said.

“The fact that it is speech does not necessarily protect it. If it’s illegal speech, it’s illegal, he added.

“They can say tomorrow that peanut butter is illegal”

Those who stand firm on Tornado Cash’s underlying neutrality fear that Monday’s decision is just the tip of the iceberg. For them, the US government could now justify banning virtually any service or product due to the fact that it could used to achieve an evil end.

“They could do this with anything,” MakerDAO delegate Chris Blec added Decrypt. “They can say tomorrow that peanut butter is illegal: if you buy it, use it, eat it, you go to jail. And nobody is going to buy it or eat it or use it. This is called totalitarianism.”

Blec believes, when it comes to crypto, that the US government will not be satisfied until the possibility of individuals trading digital money anonymously is eliminated.

“There is no cryptocurrency that cannot be used by bad people,” Blec said. “So all open blockchain technology is susceptible to this type of attack. The only way for the government to address this is to have full knowledge of each [user’s identity].”

It is, of course, a non-starter for many in a community built on the principles of decentralization, privacy and anonymity.

And as the implications of the Tornado Cash ban begin to ripple across the wider crypto community, many must now choose between obeying the law and adhering to such ideological commitments.

Consider the fact that in addition to banning Tornado Cash itself, the Treasury Department blacklisted a long list of Ethereum addresses associated with the service. Doing business with these addresses is now, in the eyes of the federal government, the equivalent of doing business with a North Korean terrorist cell.

All Ethereum transactions are approved by countless mining machines (but that will change soon the merger event in September) around the world, which processes blocks of pending transactions to receive financial rewards. If such a miner were to authorize the transaction of a finance-approved address, would they have committed a crime along the lines of aiding an Iranian-sponsored militia?

How the US government will choose to respond to – and potentially prosecute – these repercussions of the ban remains an open question. But what seems certain is that the Ethereum network will not help users comply with the government’s wishes.

When asked how ETH miners should best navigate the potential risks now posed by validating transactions that may be illegal, Ethereum core developer Micah Zoltu responded Decrypt: “My broad recommendation to people is not to be an American citizen. It’s too dangerous.”

Zoltu told Decrypt that Ethereum has no intention of creating tools to help users comply with Treasury sanctions, and went so far as to say that if validating services start trying to avoid sanctioned addresses, they should be severely punished.

“I would advocate that if a majority of validators actually start censoring (as in refusing to build on blocks containing Tornado transactions), that a user-activated hard fork should occur that financially penalizes them all,” Zoltu said. “If you can’t run a validator in a censorship-proof way, you shouldn’t run a validator.”

When asked if Zoltu’s views reflect the broader Ethereum community, the Ethereum Foundation declined to comment.

Compliance or defiance?

Such an attitude of open breach of the Treasury’s ban has quickly gained traction in the wider crypto community.

Some believe that defiance could set the crypto industry up for a protracted and unprecedented battle with US regulators.

Johns Hopkins’ Matthew Green believes that in response to Tornado Cash’s ban, other similar financial privacy services are likely to proliferate, as crypto users and thought leaders seek to reaffirm their commitment to privacy and decentralization.

“I think you’re going to see privacy technologies proliferate, I think you’re going to see more and more money protected by these things,” Green told Decrypt. “And then the Treasury has to make a decision: is this a surgical thing they did to Tornado Cash, or are they going to extend this [ban] to all privacy systems?”

In such a scenario, as the US government puts further pressure on the crypto industry to crack down on financial anonymity, the industry is likely to respond in turn with more open opposition to these regulations and double down on banned technologies.

“Maybe this sets up a war where it’s harder and harder to be surgical with sanctions,” Green said. “And it ends up being all or nothing, all of crypto has to be destroyed or aborted.”

The likelihood of such a scenario is unclear.

But if this week is any indication of how the crypto community can be expected to react to further government sanctions that violate the privacy of crypto transactions, this war is going to be a long one.