The tornado tears through crypto- POLITICO

With help from Derek Robertson

This week, the crypto world is battling with new sanctions against Tornado Casha blockchain tool that is sometimes used by hackers – including allegedly a notorious North Korean group – to launder cryptocurrency.

While the Ministry of Finance routinely sanctions cybercriminals, the measures rolled out on Monday represent something new. They appear to be the first attempt to sanction lines of code running on a decentralized network. It is a test of the government’s power to use existing enforcement tools in the crypto ecosystem.

At the same time, the sanctions reveal a deep rift in the crypto world between believers in the technology’s original libertarian ethos and industry participants eager to show that crypto firms can be responsible corporate citizens.

Let’s break down what’s happening, and what’s next.

These sanctions are different.

This is not the first time that the Ministry of Finance has issued crypto-related sanctions. In April, it sanctioned another mixer — a tool that allows people to obscure the origin of their cryptocurrency holdings — used by North Korean hackers. Like countless other sanctions targets, this mixer was a centrally controlled device.

Tornado Cash is also a mixer. But it is a decentralized protocol that runs on the Ethereum network. So it is unclear exactly how the sanctions will be applied.

Indeed, some have already taken it upon themselves to illustrate the mismatch between existing sanctions rules and a decentralized protocol.

Sanctions rules prohibit anyone from engaging in transactions with the Ethereum addresses used by Tornado Cash. However, because it is an automated tool, anyone with the necessary technical knowledge can still use Tornado Cash to send cryptocurrency to any Ethereum address, whether the recipient wants it or not.

In the wake of the sanctions announcement, an anonymous blockchain user has been sending Ether to the addresses of prominent people, such as world-famous DJ Steve Aoki. The recipients of these unwanted transactions have no way to block them, but they can technically cross the Treasury Department as recipients of cryptocurrency from a sanctioned Tornado Cash address, with little recourse under the law as written.

“The only escape valve is prosecutorial discretion,” said Peter van Valkenburgh, director of research at CoinCenter, a crypto advocacy group that opposes the new sanctions.

The response also exacerbates divisions in the crypto world.

On the one hand, managers are eager to be on good terms with government agencies. On the other are true believers who want to fulfill blockchain’s potential for privacy and authority-defying decentralization.

Many centralized entities, such as code repository Github and stablecoin issuer Circle, have responded to the sanctions by suspending accounts and freezing assets linked to Tornado Cash. Many crypto advocates, however, have condemned the Treasury’s move as dangerous overreach.

An employee at a crypto trading group declined to address the sanctions on the record at all, saying the case had divided the group’s membership, with fierce debate in its members-only group chat on the encrypted messaging app Signal.

The sanctions may have unintended consequences.

Crypto watchers expect to see increased interest in technical innovations that allow blockchain networks to become more secretive – such as zero knowledge certificate, which Tornado Cash itself uses — and more decentralized than they already are. In other words, less exposed to future state sanctions.

“This will quickly escalate,” Van Falkenberg said.

It is still somewhat unclear which legal complaint humans have when AI causes harm – as when it falsely accusing people of unemployment fraud, or discriminates protected categories. IN a new report from the University of California Berkeley’s Center for Long-Term Cybersecurity, a Berkeley researcher looks at the potential risks posed by today’s AI applications and offers some recommendations (many related to clarifying the legal code) about what to do:

• Establish a dedicated and knowledgeable ombudsman to mediate disputes between people and the companies implementing AI
• Clarify the law on how people affected by AI-made decisions can file a complaint or pursue legal action
• Engage directly with marginalized communities to find out how they may or may not be affected by AI-driven decisions

Ifejesu Ogunleye, the report’s author, writes that “the peculiarities of AI systems often reduce the effectiveness” of existing legal redress systems, and that without specifically targeted regulatory action, which The European Union is currently taking, those at greatest risk of injury may suffer even more. — Derek Robertson

What exactly is “entertainment”?

This morning Balaji Srinivasan, the Web3 guru and “Network State” authorstated his bullishness on the potential for “AI influencers” to replace our current entertainment landscape with social media (which in turn replaced the cable TV-bound world of the Kardashians, et al.).

The idea is that AI-generated “personalities”, powered by data about what users already like, will be able to fulfill this need more reliably than the human imagination can, making what are basically guesses by comparison – the author of a post Srinivasan quoted as saying, “fully custom generated content.”

But there is a big gap here when it comes to understanding “entertainment” itself. An AI-generated Tom Cruise clone, as Srinivasan cited, can be “entertaining” to the extent that it captures our attention, yes. But it might just be entertaining because we know who Tom Cruise isand love him as one icon of human creativity and ingenuity he embodied in his films from the 1980s. Computer-generated entertainment will certainly play a role in our future, but there is no actual precedent for AI yet creates a star as opposed to merely preserving, or imitating, pre-existing ones. — Derek Robertson

Stay in touch with the entire team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]); and Heidi Vogt ([email protected]). Follow us on Twitter @DigitalFuture.

Ben Schreckinger covers technology, finance and politics for POLITICO; he is an investor in cryptocurrency.

If you have had this newsletter forwarded to you, you can sign up here. And read our mission statement here.