“He that would make his own liberty secure, must guard even his enemy from oppression; for if he violates this duty, he establishes a precedent that will reach to himself.” – Thomas Paine
It was only six months ago that a leader of a G7 democracy granted himself temporary dictatorial powers, retroactively made protesting against his policies illegal, froze the bank accounts of dissidents with no due process, and jailed organizers of an opposition movement that gained significant domestic support and wide international attention. When such events occur in places like Russia or China, people in the West are universal in their condemnation. When they happen here, many first consider whether the aspiring totalitarian is “on their team” before casting judgment, forgetting to consider the possibility that the “other team” might one day regain power and exploit such dangerous precedents.
At the height of Canadian Prime Minister Justin Trudeau’s crackdown against the Freedom Convoy, a particularly disturbing incident occurred which has since been mostly forgotten. The protestors were initially being funded in part by a donation campaign on the popular crowdfunding site GoFundMe until Trudeau’s government forced the company that operates the site to freeze all funds raised in support of the truckers. Motivated donors quickly moved to GiveSendGo, an alternative crowdfunding site. In a subsequent coincidence that couldn’t possibly involve the resources of the Canadian intelligence community, GiveSendGo was “hacked,” and the personal details of some 92,000 donors to the Freedom Convoy were leaked online. Instead of inquiring into how the hack occurred or who was behind it, many Canadian reporters harassed the donors in a grotesque display of journalistic malpractice. The message from Trudeau was clear: donate to the wrong people and we’ll ruin your lives.
Not satisfied with freezing funds donated using traditional fiat currency, the Trudeau government also sanctioned dozens of cryptocurrency wallets. Here’s how CoinDesk described it (emphasis added throughout):
“The Ontario Provincial Police and Royal Canadian Mounted Police ordered all regulated financial firms to cease facilitating any transactions from 34 crypto wallets tied to funding trucker-led protests in the country.
The federal police agencies, working with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), are investigating cryptocurrency donations supporting the weeks-long protest against Canada’s vaccine mandate. The protests are now deemed illegal under the Emergencies Act invoked by Canadian Prime Minister Justin Trudeau for the first time since the law was passed in 1988.”
Imagine a US citizen – having witnessed what transpired in Canada and being acutely aware of the hyperpolarization of US politics – decides she would like to make a donation to a liberal cause she supports. Wary of the potential for Donald Trump to return to the White House, she is determined to donate in a discreet manner. The organization she wants to support accepts cryptocurrencies, but she is hesitant to use her main wallet because it holds the bulk of her holdings, and losing access to those assets would be financially devastating. Blockchains might be pseudonymous, but they certainly aren’t fully anonymous. What are her options?
Enter crypto mixers, cleverly designed decentralized protocols for making transactions on the blockchain more private. In this example, our concerned citizen could send $500 worth of crypto to a mixer in return for a randomized key known only to her. She could then separately create a new wallet, send her unique key to the mixer from it, and receive her crypto back. Armed with this “clean” crypto – unassociated with her other assets and much more difficult to tie to her identity – she comfortably makes her donation. The authorities would be able to see that she sent $500 worth of crypto to a mixer, but it would be almost impossible to discover what she did with it.
Of course, there is a fine line between the legitimate need for privacy in financial transactions and criminal money laundering, and crypto mixers cannot distinguish between the two. This makes them particularly popular among criminal money launderers. Last week, the US Department of Treasury hit back hard:
“The Treasury Department has banned all Americans from using decentralized crypto-mixing service Tornado Cash.
The Office of Foreign Assets Control (OFAC), a watchdog agency tasked with preventing sanctions violations, on Monday added Tornado Cash to its Specially Designated Nationals list, a running tally of blacklisted people, entities and cryptocurrency addresses. As a result, all U.S. persons and entities are prohibited from interacting with Tornado Cash or any of the Ethereum wallet addresses tied to the protocol. Those who do may face criminal penalties.”
While we are not surprised to see the government take action – we have been anticipating regulatory moves in crypto for some time – these particular sanctions raise troubling technical, legal, and constitutional questions. The broad nature of the enforcement action makes it susceptible to all manner of unintended consequences, some of which are already playing out. Sanctioning Tornado Cash could be the first step toward gutting the entire cryptocurrency industry. Think this sounds hyperbolic? Let’s connect a few dots.