Major crypto firms Circle and Coinbase have been forced to comply with the US Treasury Department’s sanctions against Tornado Cash under Bank Secrecy Act (BSA) requirements, said Circle CEO Jeremy Allaire on Tuesday.
The executive discussed the precedent set by the department’s latest move as it pertains to privacy and security on the internet, and what it means for the blockchain industry going forward.
Crossing a New Threshold
As explained by Allaire in a Twitter thread, both Circle and Coinbase have “restricted the movement of USDC funds” into sanctioned ETH addresses associated with Tornado Cash. The Treasury Department provided a full list of these addresses in a press release on Monday.
The Center consortium, founded between Circle and Coinbase, has the power to freeze USDC from entering certain addresses at the smart contract level. According to the analytics company Dune, Tornado Cash’s addresses were added to USDC’s blacklist the day of the Treasury’s announcement.
The CEO highlighted that nearly all Virtual Asset Service Providers have likely taken similar steps, given that avoiding US sanctions obligations could land them up to 30 years in prison. Nevertheless, he warned that the state’s latest impositions have “crossed a major threshold” in internet history, in that a major government is now blocking the functioning of open source software.
“It raises extraordinary questions about privacy and security on the internet, and the future of public internet digital currency,” he said. “We have noted the tension between privacy and security as a policy matter – yesterday, this stopped being an abstraction.”
Regulating an Open-Source Protocol
Unlike other centralized entities, Tornado cash is an open-source tool deployed using smart contracts on Ethereum. It can be used by anybody to enhance the privacy of their transactions – but is also frequently used by criminals to cover their on-chain tracks after stealing money.
For example, Nansen analytics found in late April that about 15% of Tornado Cash deposits were stolen goods from the Ronin Bridge hack – the largest hack in Defi history.
Given the circumstances, Allaire said that it is now a time for the crypto industry to “sharpen its focus” on policy issues related to financial privacy. While policy efforts in the past have focused on centralized intermediaries and issuers, more attention must be given to “open source, self-running protocols” from now on.
Allaire added that Circle will be contacting crypto industry leaders and developers in the coming days to construct policy frameworks aimed at striking the balance between privacy, and financial integrity surrounding open-source code.
“This is a pillar in the fight to protect DeFi and the future of public internet digital currency,” he concluded.
Vitalik Buterin – co-founder of Ethereum – revealed on Tuesday that he personally used cryptocurrency Tornado Cash when sending donations to Ukraine. He said the transaction was geared towards “protecting the recipients,” rather than his own identity.