The Tornado Cash Drama Sheds Light On A Very Serious Debate

If you missed last week’s article and are not quite up to speed on what’s happening, here’s a quick TLDR on the Tornado Cash situation.

• Tornado Cash (TC) is an app on Ethereum that allows users to transfer funds privately and anonymously.

• This appeals to law-abiding citizens seeking privacy and criminals looking to launder money.

• This also appeals to people around the world without an ounce of financial freedom, who are perhaps attempting to evade the powers of an authoritarian regime.

• The U.S. Treasury Department, however, has decided that criminals using TC were enough of a problem to warrant putting it on the OFAC SDN (Office of Foreign Assets Control Specially Designated Nationals And Blocked Persons) list.

• This makes it illegal for U.S. citizens to interact with TC in any way.

Here’s what has happened since we last published…

Tornado Cash Developer Arrested in Amsterdam

29-year-old Tornado Cash developer Alexey Pertsev was arrested in Amsterdam last Wednesday, a few days after the much-maligned U.S. sanctions against Tornado Cash.

It’s a frightening turn of events for a story that was already among the scariest in crypto’s recent history.

The official statement regarding Mr. Pertsev’s arrest states:

Basically, the Fiscal and Information Services (FIOD), the agency responsible for investigating financial crimes, is saying that Mr. Pertsev helped criminals launder money through Tornado Cash.

Immediately, the crypto community was up in arms, with many high profile executives stating that locking someone up over writing code sets a dangerous precedent.

Their argument is that there is a well-established understanding that code is a form of free speech. This has allowed developers to write code that pushes the boundaries and meaningfully affects the world without fear of legal recourse.

Arrests like Mr. Pertsev’s could scare people away from experimenting with coding like they had in the past.

Nobody wants to go to prison for a few lines of code.

Coin Center Prepares Legal Challenge to Tornado Cash Sanctions

If the Tornado Cash debacle has shown us anything, it’s that crypto is not going down without a fight.

Since the sanctioning of Tornado Cash and the arrest of Mr. Pertsev, Coin Center, a crypto policy think tank, announced that they are exploring a court challenge to the Tornado Cash blacklisting.

It’s a case that has tremendous implications for crypto, privacy, and digital code.

Coin Center believes that the Treasury Department has overstepped its legal authority in blacklisting TC.

Like most legal documents, there’s a lot of jargon and mental gymnastics. But, beneath all that, their argument boils down to one key point: the SDN (Specially Designated Nationals And Blocked Persons List) is reserved for persons, and TC is just a piece of open-source code, not a person.

To illustrate this point, Coin Center compares the May blacklisting of similar privacy tool Blender with TC.

For Blender, an addition to the SDN was justified because it was a company. There were people who controlled Blender and decided to provide privacy services to criminals. This made adding them to the SDN wholly justified.

The opposite is true with TC according to Coin Center. Nobody controls TC due to its decentralized and open-source nature. It is simply just a piece of code that anybody can use. This means that the developers have no control over who uses TC and are utterly powerless to stop criminals from using TC.

This distinction between code and persons is the crux of Coin Center’s case. Persons are within OFAC’s jurisdiction. Autonomous code is not.

If Coin Center can prove this in court, TC might live to see another day.

The Other Side

Longtime readers of CoinSnacks know that your trusty writers are quite skeptical of government authorities from a foundational level.

With that being said, to be intellectually honest, it is worth trying to steelman any argument and take a look from the other side.

At this point in time, many in the crypto community are passing judgment and making statements based on incomplete information. Only a very small amount of information has been released regarding TC and the arrest and there may be a deeper story than is currently understood by the community.

In regards to Mr. Pertsev’s arrest, it is quite possible that the story is much deeper than simply that a software developer was arrested for writing code.

In regards to the sanctions against TC, it’s quite possible OFAC has damning information that has yet to be made public. It is also possible that OFAC has made a mistake, misunderstands the technology, or has succumbed to political pressure as Jake Chervinsky points out.

At this point in time, we simply don’t know.

But, if the Tornado Cash story is actually that it is an organization that developed, built, and profited from code that the DPRK used to launder $500 million+ for their nuclear program, we have a problem. Again, many are pointing out that the code is open source, but Tornado Cash also had a token (TORN) which paid holders 1% of withdrawal fees. An open source method to profit off of illegal activity is not a great argument.

We know we will get a lot of feedback on this section, but again we are just providing an alternative viewpoint.

Even in Coin Center’s argument they point out:

Our Take

Although we want to give the benefit of the doubt, our gut feeling is that the government is once again doing something nefarious.

As the saying goes, when people show you who they are, believe them the first time. When it comes to crypto, the US government has shown their true colors more than once.

With that being said, the crypto – and particularly DeFi – community needs to begin having an adult conversation around the balance between anonymity and safety. Yes, the permissionless nature of crypto is positive for the world. But, we believe most people can agree that any tool that is used to fund the DPRKs nuclear development (or other illegal or immoral acts) is probably not a great thing.

Just as we believe the US government should be smart enough to figure out other ways to fight crime and immoral behavior other than sanctioning code, we also believe the crypto community is smart enough to build something that simply works better.

Be honest with yourself, if you built a tool – open source or not – that allowed for immoral activity (we are talking human trafficking, enslavement, nuclear development, etc) to flourish, how would you feel?

At the end of the day, we find it quite hypocritical that governments around the world are sanctioning Tornado Cash and arresting its developers while at the same time banks such as HSBC admit to laundering nearly $1 billion for Sinaloa cartel and other Mexican drug gangs and after being caught and paying a fine continued to launder for Ponzi schemes and drug cartels.