Tornado Cash is a Decentralised Autonomous Organisation, aka a computer program. It's software that "mixes", taking crypto transactions and anonymising the sender and receiver. There's nothing wrong with that, unless you're laundering money! Which caused concern at the US Treasury.
Here's a story that's worth taking 2 minutes to look at. Hang in there with me as I need to use a bit of jargon.
It's about a crypto protocol called Tornado Cash.
Tornado Cash is a "mixer" protocol. In simple terms, it hides who the sender and receiver are in a transaction.
It is also a DAO. That means it is computer software. It's not an individual or company. It's just a program running on the Ethereum network. It simply does what it says on the tin.
However, despite Tornado Cash being (just) a piece of software, the US Treasury banned it last week for violating sanctions against North Korea. The Treasury has accused the computer code of being used to launder money.
Which looks like it is true. But the point is, it's just a piece of code.
- IT doesn't launder money, the bad guys do. Just like they do via big banks such as JP Morgan.
At the heart of the issue is that Tornado Cash seems to have been used by criminal groups to make stolen crypto assets hard to trace. The effect was to release half a billion dollars of funds from the theft of various cryptocurrency hacks.
The thing is that Tornado Cash was also used by many users for perfectly legitimate uses. One of the more popular examples being given was to donate to Ukraine causes without being traced by the Russian secret service.
Crypto analysts Chainalysis identified 17% of Tornado Cash transactions to be related to the alleged sanctioned use. A further 10% was related to other stolen funds, and the rest to be either used within DeFi (50%) or by centralised exchanges (18%) to get financial privacy.
This was enough for the US Treasury to take action.
Whether intentional or not, technology was now deemed toxic and the sanction was inevitable. Shortly followed by the arrest of Alexey Pertsev on August 10th, one of the developers responsible for building the technology.
Whether the individuals were involved in some particular activity with sanctioned entities, or in merely writing the code is in question as well.
Don't Blame The Code
Concerns over money laundering are a problem that hangs over the crypto ecosystem. Chainalysis estimated that something like $33 billion in illicit funds have moved over the crypto blockchains since 2016.
However, this pales into insignificance in the global money laundering "market," which the UN estimates to be as much as $2 trillion a year crossing traditional banking networks.
But this is a crypto story and the writing of software code is considered an act of "free speech" by many. In this case it's easier to go chase the computer program than it is to shut down the large financial networks where real money laundering takes place.
Here's the thing: Rules around anti-money laundering have turned finance into one of the few industries that is built on a presumption of guilt. Financial services firms assume everyone is a money launderer, drug dealer or tax evader unless they are in insurance, when they assume every claimant is a liar or fraudster.
As a result, financial institutions use risk-based procedures to make sure you're not laundering cash. Which is crazy. It's like Tesco or Walmart running background checks on every customer before they can walk through the door.
The point is that this story leads us to the subject of financial inclusion. The wealthy can navigate money laundering regimes, whereas the poorest cannot.
Poor, vulnerable and marginalised folk can't access the West's network of financial systems on a level playing field.
This is one reason why DeFi and crypto offer an appealing alternative to digital banking and electronic fiat currency. And why Bitcoin in particular, is proving to be an attractive alternative to a world dominated by the USD.
Now, you may be thinking, if Tornado Cash is mixing up the identities of the sender and receiver, that all sounds a bit dodgy and it's right to sanction them.
But what if you were sending money to support Russians who were secretly helping Ukrainians. You'd want that to be secret, undetected by Putin's secret police, wouldn't you? There are many legitimate reasons for wanting to keep a transaction anonymous, as well as legitimate ones.
Now think about this: JP Morgan Chase is the 2nd largest bank in the world, and undertakes many legitimate financial activities. It has also been found to have been involved in facilitating money laundering. But it's not been sanctioned. Is it really that different?
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