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When the U.S. Treasury Department announced the crackdown on Tornado Cash the government took its boldest and most visible steps in the crypto realm. Before this blacklisting, most of the crypto regulation and enforcement we had seen in this space did not catch the public's attention in the way this move has done. While I am not sure what sort of reception the government had anticipated from this move it is unlikely that they expected the reception they have received.
Background
Over the last two years, starting when DeFi summer exploded onto the scene, protocols and bridges being attacked with millions in crypto being lost have been a pretty consistent thing to read about in the media. To the average person, it would seem that cryptos and blockchains are even more vulnerable than they are because of all of the reports talking about billions a year being stolen and lost. While many in the space understand that it is not as cut and dry as these reports have made it out to be and in many cases, part of the lost funds are recovered reports often fail to mention that. This has resulted in the pretty consistent theme that cryptos are not safe and are used by criminals for illicit activities.
As crypto and blockchain have grown and more and more people have gotten involved in this space the default anonymity that was in the space has slowly been whittled away for better or worse. To help bring back the anonymous nature that some people enjoyed different coins, tokens, and protocols have been established to facilitate that. Out of all the different ones out there one that had been popular for the last few years was Tornado Cash.
Tornado Cash is a fully decentralized cryptocurrency tumbler. This means that whomever or whoever developed this number is not clearly known. It also has a governance token that controls its governance of it meaning that no single source was in control of the protocol. Over its lifetime it has been used by a wide variety of individuals from regular everyday people to industry leaders like Vitalik Buterin. The reason for this was simple people did not want others to be able to easily identify them and for someone like Vitalik Buterin who used it for donating to different causes, this is an important thing that we see with anonymous donations with the U.S. dollar. However, just like with the U.S. dollar it has been used by criminals with it coming out that the North Korean hacker group, the Lazarus Group, using this protocol to launder the crypto it has hacked from various protocols and bridges.
Blacklisting
Since several large hacks had used this protocol the U.S. government first blacklisted the wallets associated with the hacks. This made sense as it would impact the ability of criminals to use their ill-gotten gains. When it was first talked about possibly sanctioning or blacklisting the protocol this was initially dismissed because unlike other software that has previously been banned by the government Tornado Cash was not created strictly for illicit activities but to protect individual's privacy. The government however decided that blacklisting the protocol would be the "best" option and since made it illegal for U.S. citizens or residents to use the protocol.
Naturally, though it is not as simple as telling someone to not use the protocol anymore and after a few days has led to someone getting arrested. See when it got blacklisted people that were involved with its development or creation also became wanted individuals by the government. Even though the protocol is now 100% decentralized and thus is not under any single person's control the Dutch police this week arrested a citizen due to his suspected involvement in the development of the protocol. This arrest brought to the general publics' attention what was going on and how in-depth and worrisome this development was.
With the arrest of this person in the Netherlands people in Europe has begun to speak out about the effects and influence that the U.S. has on their countries and their legal systems. This has sparked some severe and fierce pushback from a ton of rights groups. It has also given people in the crypto/blockchain space a much larger platform to stand on. What the government did was essentially make it illegal for a piece of software to be used or utilized by people. No matter your political beliefs this has drawn criticism across the board due to government involvement in people's lives to the possibility of abuse by a government or government agency. From the temperature on The Hill, this was not expected and was something that I thought that they could slip by without any pushback and that has not happened.
Cryptocurrency advocacy groups in the U.S. as well have been very critical of this decision and with the attention, it has grabbed have been able to get the attention of the American public. Not only that but recently someone or a group of people have utilized Tornado Cash to send people Ethereum dust to a wide variety of wallets. The wallets that have been targeted are big named people in both the crypto space and in the investment space overall. Individuals like Mark Cuban, Vitalik Buterin, and others whose wallets are well known to have been sent Ethereum via Tornado Cash, and according to the U.S. by doing this the wallets are now "contaminated" and subject to more intense oversight by the government since they have interacted with the sanctioned mixer. This creates a headache for not only the owners and users of the wallet but also for the government as now they have to devote resources to the different wallets that have received funds.
It has also shown the shortcoming that the U.S. government has and will run into when it tries to do things like this. As much as U.S. regulators try they cannot stomp out this protocol or people that use it due to its decentralized nature. Since this is becoming more and more mainstream and part of the future it will be up to the U.S. government to figure out what else to do because the path that they have chosen not only looks bad but is unsustainable. Innovation and cooperation with the industry will be needed if they want to really address these hacks and prevent hackers from being able to launder their money or crypto through this. The U.S. alone cannot stop this and it will need the industry to help to really be able to address this issue.
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