Coinbase announced that it had begun bankrolling a lawsuit against US Treasury Department on Sept. 8. Six people are challenging the ban on Tornado Cash. The lawsuit is being funded by Coinbase, a cryptocurrency exchange. On Sept. 9, Gary Gensler, Chair of Securities and Exchange Commission (SEC), announced that he was working with Congress to develop legislation to improve cryptocurrency regulation.
These two stories do not have to be mutually exclusive. This sequence of events shows that governments react more than they do when it comes decentralized finance (DeFi).
The Office of Foreign Assets Control (OFAC), sanctioned Tornado Cash back in August. OFAC stated that the smart contract mixer helped to launder more cryptocurrency than $7 billion since its inception in 2019. This includes over $455 million taken by the North Korean-linked hackers Lazarus Group.
Brian Armstrong, CEO of Coinbase, stated in a statement that Treasury had gone too far by sanctioning “an entire technology” instead of just a few individuals. Coinbase also claimed the sanctions were beyond the authority of the department.
Crypto users should be able to remove privacy and security; Harm innocent people; and Suppress innovation.
Gensler doubled his push for stricter regulation of DeFi markets the next day, saying that crypto companies would not prosper without it. “Nothing in the crypto markets is compatible with securities laws. Investor protection is equally important, regardless of the underlying technology.
Related: US Treasury clarifies that publishing Tornado Cash code is not a violation of sanctions
His choice of words like “regardless underlying technologies” reveals his ignorance of crypto and blockchain technology. Web3 also raised concerns about his speech, many saying that government regulation is a wolf dressed in sheep’s clothes.
Jake Chervinksy is a lawyer and heads the policy department at the Blockchain Association. He tweeted, “Crypto” in response.
Chair Gensler claims that most digital assets can be considered securities. Legal precedents for decades have shown the contrary. Crypto is an innovative and unique technology. It is up to Congress (not SEC Chair) how crypto should be regulated. My take in WSJ:https://t.co/E7kql6Vohb
— Jake Chervinsky (@jchervinsky) September 8, 2022
It is enough to be concerned about security legislation. The Tornado Cash sanctions are a worrying example for anyone who is involved with digital assets. Blockchain technology and cryptography are constantly evolving. What’s secure today might not be secure tomorrow and almost certainly will not be next year. However, there are many legitimate uses for blockchain tech.
DeFi is all about privacy. Decentralized finance is the key to privacy. Tornado Cash, a mixer that protects the privacy of users, mixes users’ withdrawals and deposits in liquidity pools. This hides their addresses and secures their identities. For a variety of legal reasons, users want to keep their transactions private.
One of the plaintiffs used the mixer anonymously to give money to Ukraine. Another early adopter crypto, another has a large social media following and his public ENS number is linked to his Twitter account. To protect his security and transact, he used the smart contract. Their assets are now in Tornado Cash.
Financial information is the most personal and sensitive information about a person. Law-abiding citizens are entitled to keep this information private. However, this privacy will be compromised by the regulation proposed by Gensler and the SEC as well as other governments around the globe.
Related: Coinbase backs crypto investors after Tornado Cash sanctions
As with these sanctions, the idea of incarcerating people for using lawful or even benevolent services, as well as locking up developers who wrote open-source code that was not illegal at the time, is Orwellian-levels dystopian.
Treasury officials later retracted their position, clarifying that “interacting with open-source codes itself, in a manner that does not involve an prohibited transaction with Tornado Cash is not prohibited.” The guidance also states that you can copy the protocol’s source code, publish the code, and visit the website.
The similarities and timing between the stories, although they are not officially related. Gensler compared regulation to traffic control, stating that Detroit would not have taken off without traffic lights and cops on beat. Armstrong used the highways and heist analogy to say, “Sanctioning open source software is like permanently closing down a highway because robbers tried to flee from a crime scene.”
I wonder how many developers are going to be discouraged from creating game-changing code that can not only innovate industries but also help people around the globe? It is not necessary for a small group of people to stop the development of technology that has such great potential to transform sectors beyond finance.
The Coinbase lawsuit is an important case in cryptocurrency history. Its outcome, whatever it may be, will have enormous ramifications on DeFi. Its users, too.
Zac Colbert works as a freelance writer and digital marketer. Since 2007, he has been covering digital culture.
This article is intended for informational purposes only and should not be construed as investment or legal advice. These views, thoughts and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.