We’ll keep discussing the Tornado Cash situation because this is a watershed moment for the cryptocurrency industry. Lines are being drawn. The future of privacy for cryptocurrency-related operations is at stake. One could even say that the future of the industry as a whole is at stake. Does the cryptocurrency industry has a future without basic privacy tools like Tornado Cash? 

In any case, the more time passes the less probable it is for the US and Netherlands governments to have a genuine reason for their bizarre behavior. Why did the US sanction a smart contract and not specific people or organizations? And why did the Netherlands then arrest an alleged Tornado Cash developer? Was it just because he wrote some code that others used or did they have a legitimate reason? All of those questions are still in play. The more time passes the more it looks that both governments just jumped the gun on this one.

It’s as the Coinbase-funded lawsuit says…

Six people are legally challenging the OFAC sanctions on a smart contract like Tornado Cash, and Coinbase is backing the lawsuit. In a recent blog post announcing the move, Coinbase said that they support Treasury sanctioning “bad actors” and “unlawful behavior,” but in this case:

“Treasury went much further and took the unprecedented step of sanctioning an entire technology instead of specific individuals. The problem here is twofold: (1) there are legitimate applications for this type of technology and as a result of these sanctions, many innocent users now have their funds trapped and have lost access to a critical privacy tool, and (2) we believe the Treasury exceeded its authority, given by Congress, by sanctioning a technology.”

In a recent blog post by The Bitcoin Policy Institute, a banking insider explained the legitimate uses further. Notice that in this case, the banking insider is talking about the bitcoin network, but the explanation also extends to other blockchains.

“Bitcoin users who don’t want to share their entire transaction history or net worth when transacting with a merchant can use collaborative transaction tools to bring their financial privacy up to par with their other payment methods. These tools provide a similar service to what Visa provides its users today; they shield transactional details from both the counterparty to the transaction and from external observers.”

The smart contract’s GitHub repository is back, albeit in “read-only” mode. This part of the story started when the OFAC published clarifications about the Tornado Cash sanctions, and said:

“U.S. persons would not be prohibited by U.S. sanctions regulations from copying the open-source code and making it available online for others to view, as well as discussing, teaching about, or including open-source code in written publications, such as textbooks, absent additional facts.”

It looks like everything is in "read only" mode, but that is progress from an outright ban. I still encourage @github to reverse all actions and return the repositories to their former status.

— prestonvanloon.eth (@preston_vanloon) September 22, 2022

Then, Ethereum Core developer Preston Vanloon saw an opportunity and wrote GitHub directly. “Please unban Tornado Cash code repositories now,” he tweeted and then quoted the OFAC clarifications. Days later, Vanloon himself announced that the Tornado Cash repository was back. He quickly reported a caveat, though. “It looks like everything is in “read only” mode, but that is progress from an outright ban. I still encourage GithHb to reverse all actions and return the repositories to their former status.”

Progress is progress.

The fact of the matter is people still need privacy and the Tornado Cash sanctions left “a hole” in the space. Ironically, Coin Telegraph interviewed Chainalysis’ country manager for Australia and New Zealand about it. Todd Lenfield told the publication: 

“If the liquidity isn’t there, you effectively dry up a lot of [a mixers] capability. The hunting for places where there is liquidity, when it’s highly visible after things like the OFAC sanctioning of Tornado Cash, I think makes a very interesting space to keep an eye on.”

Interesting, indeed.

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