The effectiveness of sanctioning DeFi protocols at discouraging hackers remains questionable as it is easy to fork the code. The actions against Tornado Cash put financial privacy and freedom at risk as they might lead to harming those seeking to protect their funds.
John Shutt and Mhairi McAlpine from UMA said the actions of the US Treasury against Tornado Cash might still have to take twists and turns. The possible impact of the sanctions on the crypto-mixing service charged with laundering money through crypto assets needs to settle.
Criminals have allegedly used Tornado Cash to launder over USD 7 billion worth of cryptocurrencies since its creation in 2019. The US Department of the Treasury said The Lazarus Group had stolen more than USD 455 million of those assets.
The government of North Korea (DPRK) sponsors the activities of the hacking group The Lazarus Group. The United States sanctioned it in 2019 for the most significant theft of cryptocurrencies until now.
The department did not clarify why they thought USD 7 billion worth of crypto assets derived from criminal activity. They also did not explain why their estimates were much higher than those by independent third parties.
The Effects of the Sanctions against Tornado Cash on DeFi
While sanctioning DeFi protocols may improve overall crypto security little, its effectiveness in discouraging hackers remains questionable. That is because it is easy to fork the code and use the original protocol directly on the chain.
That situation proves the need for increasingly robust tools and protocols that improve decentralization, a crucial factor in protecting privacy.
Centralized Asset Managers Experience Fear and Uncertainty
Fear and uncertainty probably grip centralized asset managers due to these sanctions. DeFi developers received a reminder about the importance of censorship resistance.
A global system that allows blocking users might force its creators to decide whether to do it arbitrarily.
The sanctions against Tornado Cash may challenge personal financial privacy and freedom. That might unintentionally harm those investors seeking to protect their economic history.
The current sanctions might set a precedent by putting well-intended actors into the sights of various authorities.
US Regulators have Their Sights on Cryptocurrency Wallets
The above sanctions allow sending transactions to any wallet without prior consent or knowledge, leading to banning that address.
Following the announcement of the ban, someone sent 0.1 ETH from Tornado Cash to publicly known people, implying negative consequences for any crypto user.
In other words, these wallets might enter a ban list at regulated services like Coinbase without engaging with the sanctioned address. That situation raises an issue for crypto users as their on-chain funds risk being subject to a blockade.
The Sanctions against Tornado Cash Reveals the Need for More Decentralization
The Tornado Cash situation shows why further decentralization is necessary within teams, projects and DAOs.
Although the US sanctions are a sloppy interfering intervention, Tornado Cash is only one of many privacy protocols. The crypto industry will develop new tools to protect users while cryptocurrency trading platforms are still open and usable.
The US government might face legal battles, as the sanctions may be unconstitutional. Since cryptocurrencies are fundamentally sophisticated mathematics, the authorities will find it hard to ban them.
By Alexander Salazar
