Trouble in Paradise: U.S. Government vs. Crypto 🥊

Another day, another showdown between the crypto world and the U.S. government. 

Something called Tornado Cash (interesting name, huh?) has our DC friends in a frenzy. This week, we’re breaking down what’s been happening with the fiasco and what it could mean for the future of crypto regulation.

Let’s dive in.

What is Tornado Cash?

Before answering this question, let’s take it one step back and review a concept that sets the foundation for web3. One of the most popular characteristics of cryptocurrency, which is powered by blockchain technology, is that all data should be publicly available. Basically, anything sent on the blockchain should point back to the sender’s wallet and the receiver’s wallet—all in the name of transparency. 

Now, let’s enter Tornado Cash—the well-intentioned, yet slightly rebellious child of crypto who wants to bring back anonymity.  

Simply put, Tornado Cash is a cryptocurrency mixer that is built on the Ethereum blockchain. It facilitates anonymous transactions and makes it very difficult to trace who sends and receives crypto. Hundreds and thousands of transactions received are mixed before transferring them to the individual wallet that is set to receive the crypto. 

This is actually an interesting concept because it promotes:

• Privacy: Imagine everyone being able to see ALL of your credit card transactions and Venmo payments… yeah, sounds a little intrusive. 

• Protection: According to Time, “Vitalik Buterin, the founder of Ethereum, came out in defense of the service this week, writing on Twitter that he himself used Tornado Cash in order to donate to Ukrainian causes without putting the recipient organizations under extra scrutiny.” 

That’s great, but why is Tornado Cash in the news?

Well… the U.S. government sanctioned Tornado Cash on August 8th, stating that it “has been used to launder more than $7 billion worth of virtual currency since its creation in 2019.” 

Yes, $7 billion. 

This means that Tornado Cash is now designated as a Specially Designated National and Blocked Person (an “SDN”). Not that anyone asked, but if they need help getting off, Marty and Wendy Byrde from Ozarks are only a call away. IYKYK.

Why is North Korea in the mix?

Believe it or not, North Korea is estimated to have laundered $1B in stolen crypto funds. All through Tornado Cash. *Ring the Alarm* 

HODL (hold on for dear life) readers, it gets crazier. Ever heard of the Lazarus Group? 

If you haven’t, it’s *cool* (but they might know a little something about you). It’s a hacking group behind various political and financial data breaches, laundering $455M through Tornado Cash. And guess what? It’s BACKED by the North Korean government… 

But why would the North Korean government fund hackers? 

Some little birdies known as the US and South Korean governments said it’s for North Korea to finance its weapons program (WILD, we know). Please note that North Korea has denied the allegations. 

The US Government ain’t about that life.

Over past week couple weeks, various arms of the US government said “aht aht” to Tornado cash and a quick “no ma’am” to even more crypto things:

U.S. Treasury Department: banned American citizens from using Tornado Cash or transacting with Ethereum addresses linked to Tornado’s community (like the Lazarus Group) 

Federal Deposit Insurance Corporation (FDIC): issued cease and desist orders to 5 companies (like FTX US) for falsely stating that their crypto-related products were FDIC insured (aka when your bank says the feds got them if it fails)

What does this all signal for the future?

Looks like governments across the globe are looking for ways to regulate something that is fundamentally unregulated. And there’s arguments on either side to this debate, no matter what you think about the government or Web3:

Pros: 

• Protection: because crypto is decentralized, there’s no one to call if things go wrong (and sadly it happens, we’ve been there). Like Lauryn Hill, This could help investors and consumers find piece of mind.

• Stability: as we’ve seen crypto can be more volatile than Frank Ocean deciding to put out an album. There’s a chance that government controls can level things out a bit (but have you seen my Robinhood account these days??)

• Inclusion: as our readers know, Web3 is a complex space and it’s intimidating to enter - the government’s reach to literally everyone in the country could make it easier to access

Cons

• Taxation: the way the government taxes your income now would apply to crypto and then some (already being treated for capital gains)

• Stagnation: let’s face it - our current financial system is archaic. We risk slowing down the growth and exciting innovations happening in crypto if the government controls it

• Misaligned values: cryptocurrency was based on the foundational concept of removing the middleman. What does that mean for crypto if the middle man jumps in?

Safe to say we don’t know what the outcome will be here; but, crypto isn’t going anywhere anytime soon. So don’t worry - Kendall and Chad will help keep you, your coins, and your tokens informed no matter what the government decides!

Contributors: Kendall Rankin, Chad Payne