The US government has issued a ban on Tornado Cash. The decentralised protocol aided cryptocurrency owners in maintaining their anonymity by obfuscating information trails on the blockchain. The government said that the protocol was instrumental in the $7 billion worth of money laundering.
The OFAC—Office of Foreign Assets Control, a financial intelligence and enforcement agency of the U.S. Treasury Department—said, “Any entities that are owned, directly or indirectly, 50% or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons are prohibited.”
Crypto activists have gotten perturbed by the move and strongly criticised the government for banning the protocol. They said that since the majority of these transactions were fully authentic and lawful, the government’s decision to ban the protocol was wrongful.
They also reminded that banning Tornado Cash in the US will not stop validators from countries such as Iran, North Korea, Kazakhstan and others using the platform.
The government’s decision of banning the platform has affected only the US users who were majorly legit and not involved in illegal activities.
The activists fear that it sets a bad precedent and other decentralised finance (DeFi) protocols can also come under the lens in the future.
Some expressed shock
Justin Ehrenhofer, vice president of operations at Cake Wallet, feels that it’s wrong to sanction open-source tools. He showed concern about this and said that users in the Monero community fear the possibility the U.S. government could shut down their project too.
The digital currency Monero (XMR) enables users to send and receive money anonymously. Many people use its decentralised system to protect their transactional privacy. It is designed to withstand censorship.
Ehrenhofer questioned attempts by the authorities to “go after the entire network” as opposed to punishing specific smart contract addresses. All users situated in the United States were prohibited from using Tornado Cash’s coin mixer or any of the Ethereum wallet addresses connected to its protocol.
This move has thrown “individuals’ right to transact” out of the window.
Brian Armstrong, CEO, Coinbase tweeted that sanctioning a technology will set a bad precedent and it should be challenged. In a series of tweets, he criticised the decisions of the government in different words.
Armstrong’s tweets were not enough as some reminded him of his decision of banning XRP in 2020 on his trading platforms.
In December 2020, the Securities and Exchange Commission (SEC) filed an action against Ripple Labs Inc. and two of its executives, who were also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.
Due to the SEC action against Ripple Labs, Coinbase decided to shut down the XRP trading pairs on Coinbase Exchange, Coinbase Pro, and Coinbase.com in all territories.
Meanwhile, Crypto activists feel that industry leaders didn’t support Tornado Cash unanimously and a majority of them rather sided with the government decision of banning the platform.
Repercussions
When the prohibition was announced, the stablecoin’s parent firm, Circle, immediately froze all of the USDC on Tornado Cash and stopped any linked addresses from using USDC.
The capacity of one of the biggest and most reputable stablecoins to instantaneously freeze anyone’s account has also drawn a lot of criticism.
The stablecoin is completely centralised and is run by an organisation with an American base of operations.
Some industry leaders worry that if USDC is compelled to freeze more assets, it could kick off a chain reaction that destroys DeFi.
For instance, USDC is used in Aave loan collateralization, Uniswap trading, and as a component of the Dai stablecoin’s peg.
The entire DeFi industry would vanish overnight if the government decided to outrightly ban all three DeFi pillars as its next move and USDC concurred.