Crypto Gets Hit by a Tornado

Welcome to Bloomberg Crypto, our twice-weekly look at Bitcoin, blockchain and more. If someone forwarded this to you, sign up here. In today’s edition,  talks mixers, sanctions and other crypto existential issues: 

The eye of the Tornado

Shock waves rippled through crypto on Monday after US sanctions were imposed on Tornado Cash, a service beloved by both North Korean hackers and privacy adherents for obfuscating their transaction history. The move appeared to confirm that it’s possible to stop a decentralized service in its tracks — but if crypto can’t act as a financial privacy guarantee, then what is it good for?

The Tornado platform mixes together incoming funds into a single pot and then spits them out again, making it harder to ascertain exactly where a token has been. The service became a popular feature in many of this year’s biggest crypto exploits, utilized as a way to launder ill-gotten gains from hacks like the $600 million heist on blockchain game Axie Infinity’s Ronin bridge.

One of Tornado’s founders told Bloomberg earlier this year that it was “technically impossible” to enforce sanctions against the smart contracts underpinning its platform, meaning that in theory, its business should have escaped the long arm of the law. With the benefit of hindsight, we can see now that Tornado hadn’t accounted for an infrastructural weakness that the sector has yet to solve: Crypto hasn’t quite got round to building all its own stuff yet. 

As much as Tornado epitomizes the crypto dream of a decentralized business — operating away from the prying eyes of government agencies in the name of privacy rights — the rest of the technology isn’t up to speed. Much of the cryptosphere relies on traditional platforms to run their day-to-day operations, like Alphabet’s Gmail, Microsoft-owned code repository GitHub and chat app Discord.

Within hours of Tornado’s sanctions notice being posted, emails sent to the company’s founders bounced. Its website, where Google was listed as the domain registrar, returned a 404 error. Its GitHub account was similarly empty, partially foiling any attempts to replicate Tornado’s code with new platforms that could take its place. Even some of Tornado’s crypto got caught in the fray, with its holdings of stablecoin USDC by the token’s issuer Circle.

One of crypto’s biggest selling points is that it’s supposed to be a way around government censorship, a stateless monetary system that puts financial liberty front and center. It already struggled with this concept when Bitcoiners wanted to provide protesting Canadian truckers with a way to keep from being frozen out of their bank accounts in February — something they failed to achieve as crypto exchanges and wallets were reportedly forced to comply with the same rules.

The Tornado situation is a vivid example of the gap between what crypto wants to be and the reality. If the reliability of even its strongest decentralized tools turns out to be hollow, that suggests crypto’s very premise has some problems.

Charting it out

Hearing them out

What we’re reading (and writing) 

• Wall Street Pros Offer Crypto Holders a Backdoor Bankruptcy Exit
• Lambo Dealers Are Keeping Warm Despite Crypto Winter
• The Humbling of Coinbase (New York Times) 
• This Retailer Is Betting Retail Betting Retail Will Run on the Blockchain
• Crypto and the US Government Are Headed for a Decisive Showdown
• Crypto Miner Pushback Suggests Ethereum Offshoots Are Coming
• Crypto’s Limp BlackRock Response Is a Clear Tell: Jared Dillian (Bloomberg Opinion)

Thank you for reading. We welcome all feedback at [email protected]

Like getting your news by audio? Tune in to our new Bloomberg Crypto daily podcast on Apple Podcasts, Spotify, or the iHeartRadio app, or listen on the web

— With assistance by David Pan, and Vildana Hajric