Tornado Cash sanctions will ultimately undermine the US and strengthen crypto

The US move to sanction the open source code that makes up the Tornado Cash privacy protocol may be shocking, but it is not surprising. America has been tightening its grip on the global financial system for decades, ostensibly to cut down on bad behavior but also to project power abroad.

Economic sanctions, such as those enforced by the aptly named Office of Foreign Assets Control, are a powerful weapon. The agency’s website says it “enforces economic and trade sanctions based on United States foreign policy and national security objectives.” It does this to fight drug traffickers, terrorists and “other threats to US national security, foreign policy or economy”.

Scary stuff, especially when enforced by the issuer of the global reserve currency. But therein lies the rub because the more the US weapons access to the dollar, the greater the incentive for all other countries to find an alternative. A likely winner of this dynamic is Bitcoin (BTC). To see why, we need to study the architecture of money.

Fiat currencies such as the US dollar have no inherent transfer mechanism. Large payments can only be made through the banking system, and banks need state charters to operate. This symbiotic relationship enables governments to control not only the issuance of their money, but also access to it. For the issuer of a reserve currency, monetary censorship becomes a powerful weapon, arguably as destructive as bombs and bullets.

Related: Tornado Cash Shows DeFi Can’t Escape Regulation

Bitcoin is different because it has its own censorship-resistant payment system. Anyone can make payments to anyone else – with or without the involvement of a licensed intermediary. Governments may still have power over individual exchanges, custodians or miners, but they cannot stop the protocol or the community that runs it.

Bitcoin is also apolitical in ways that fiat currencies can never be. Along with increasingly stringent sanctions regimes, the US has recently taken the drastic step of freezing the foreign exchange reserves of Russia and Afghanistan. Regardless of one’s opinion of the legitimacy of such actions, they drive home the point that dollar reserves are only useful as long as their holders stay on America’s good side.

A critic might argue that the sanctioning of Tornado Cash proves that cryptocurrencies are not immune to politics. In fact, the US has sanctioned Ethereum and Bitcoin addresses for years. What makes crypto unique is the fact that the decentralized protocols don’t care, at least not in a way that a bank can.

After all, the permissionless nature of these networks means anyone can do anything, including continuing to process transactions for sanctioned addresses. That doesn’t mean a European miner or South American stock exchange wants to upset Washington, but it does mean they could if they had to. This option can come in handy in a crisis.

Tornado Cash developer arrested

Make Kwon still free and do media interviews

The world is a stupid place

— sassal.eth (@sassal0x) 15 August 2022

None of this means that global adoption of Bitcoin is imminent. The infrastructure remains raw, and most governments remain cautious, in part because censorship resistance also challenges their money grip at home. But the more globalization reverses, and the more America tries to impose its will on other countries, the greater the need for a backup plan.

Related: Tornado Cash DAO goes down without explanation after treasury fund vote

This relatively new threat to the dollar explains why America refuses to adopt sensible crypto regulations, despite a thriving domestic industry. The more the US normalizes Bitcoin as a store of value internally, the higher the chance that it will be adopted as a reserve asset abroad. If it’s good for Blackrock, why not a central bank?

Countries do not need to put their entire reserves into Bitcoin to benefit from its utility. Given its relative youth and volatility, owning too much would be risky – just ask El Salvador. But as a “break glass-in-case-of-emergency” backup asset, a little would go a long way.

Like any aging empire, America is likely to react to this competition. If other countries begin to adopt Bitcoin, Washington could become even more draconian with the use of sanctions, attempts to blacklist coins held by regimes it does not like, and penalize miners who process certain transactions. But it would mostly hurt the US crypto industry while reinforcing the need for a global alternative.

Historically, the most popular reserve currencies have been issued by countries with reliable legal systems. The more arbitrary US sanctions become, the less confidence others will have in their money. Bitcoin always does what it’s supposed to, making it an ideal reserve currency.