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Early on August 8, 2023, the U.S. Treasury announced that Tornado Cash had been added to the U.S. Office of Foreign Assets Control (OFAC) SDN List (the list of Specially Designated Nationals with which Americans and U.S. businesses do not are not authorized to carry out transactions). Tornado Cash, a non-custodial open-source software project built on Ethereum, has allowed users to shuffle their coins through the use of the Tornado Cash smart contract, obscuring the previous trail of coins (which are of course transacted on a ledger transparent) .
The sanctions imposed were particularly noteworthy because they did not target an individual person or a particular digital wallet address, but rather the use of a smart contract protocol, which in its most basic form is just a information. The precedent set by these actions is not ideal for open source software development.
All Time Tornado Cash Stats – Source: Dune Analytics
All Time Tornado Cash Stats – Source: Dune Analytics
Following the announcement, it was seen that Circle, the centralized USDC stablecoin issuer, blacklisted all sanctioned addresses for not using USDC.
These actions have led many to question the security of holding centralized digital assets, even for non-criminals who simply prefer to use privacy protection tools.
The total number of USDC addresses that are blacklisted now stands at a current total of 81. Readers can follow the list of banned addresses here.
Source: Dune Analysis
On an equally chilling note for active bitcoin/crypto developers, the co-creator of Tornado Cash Roman Semenov had its GitHub account (open source development repository) suspended. This should worry freedom-loving bitcoin/crypto enthusiasts, given the nature of the penalties imposed on Tornado Cash – which, as noted earlier in the article, is simply non-custodial software.
These actions also raise the question of what the future holds for many tools in the so-called DeFi space, which depend on centralized stablecoins and which may have centralized development choke points.
As brutal as it is, the organic and decentralized nature of bitcoin’s rise is the only reason it’s still standing today. Open source software will continue to work as intended, but given the increasing pressure that will likely be placed on software/wallet/protocol developers, only the most powerful and truly decentralized networks will not be co-opted.
Finally, it’s worth remembering that stablecoins themselves, while useful for escaping the short-term volatility of bitcoins/other crypto assets and helping many people around the world gain access to US dollars, are centralized.
Zooming out, when looking at the long-term case of bitcoin, one of its strongest value propositions is the fact that it is an asset with no counterparty risk or risk of dilution (devaluation). Yet, more importantly in light of the many government regulations taking shape and likely to come, Bitcoin’s true decentralized properties and censorship resistance will be equally important.
