As support for Tornado Cash developer Alexey Pertsev mounts, questions regarding the legality of his arrest and the future of DeFi innovation continue to come to the forefront.
Things have not been looking too good for the crypto market in recent months, with the market seemingly being gripped by one piece of bad news after another. To this point, on Aug. 8, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued legal sanctions against digital currency mixer Tornado Cash.
As per the regulatory body, since the platform’s inception in 2019, it has been used for a host of illicit money laundering activities estimated to be worth $7 billion. Of this sum, it is estimated that $455 million was controlled by the notorious Lazarus Group, a North Korean state-sponsored hacking group. Additionally, Tornado Cash was also used to launder over $96 million of ill-gotten funds derived from June’s Harmony Bridge hack and $7.8 million from this month’s Nomad heist.
Before proceeding any further, however, it would be best to understand what exactly a cryptocurrency mixer is. Simply put, it is an offering that helps obfuscate potentially identifiable or tainted cryptocurrency funds with others to erase any trails linked with the assets, thus making it impossible for anyone to trace the tokens back to their original source.
Creator arrest leads to public outcry
On Aug. 12, Alexey Pertsev, the creator of Tornado Cash, was arrested by Dutch authorities. According to a press release issued by the financial crime authority of the Netherlands — the Fiscal Information and Investigation Service — the arrest was made based on Pertsev being involved in the “concealment of criminal financial flows and facilitating money laundering.”
While Tornado Cash can potentially be used by bad actors to hide criminal proceeds, it can and is also be used to facilitate a wide array of legitimate activities. The Dutch police have yet to make it clear as to which exact rules Pertsev broke, even though different media outlets have speculated and offered varying explanations as to why he was arrested. The Tornado creator has yet to be charged with any wrongdoing.
Following Pertsev’s detainment, a mass of protesters gathered in Amsterdam’s Dam Square on August 20 to voice their displeasure with the handling of the matter. And, while the demonstrators did not directly comment on the legal issues surrounding the arrest, they did claim that Pertsev’s arrest signaled a dark future for the fast-growing Web3 ecosystem. Not only that, but they also believe that it could have a chilling effect on the Netherlands’ existing blockchain ecosystem.
Mark Smargon, CEO of decentralized payment network Fuse, told Cointelegraph that while he is very disappointed to see a developer being arrested for simply having written a piece of code, to avoid such scenarios in the future, crypto finance entities — especially those who see mainstream adoption on the horizon — should be willing to meet regulators halfway to mitigate existing security issues while ensuring people’s rights to individual privacy.
However, Abraham Piha, CEO and co-founder of Web3-focused firm Tomi, told Cointelegraph that government sanctions like these are scary if one starts looking at them objectively:
“Tornado existed only because most blockchains were not private enough. If successive updates of Ethereum or Bitcoin include protocol integrations like Mimblewimble, will the next step be to block them as well? This act is yet another reason to push for Web3, a free web, controlled by users and not by some big brother governments.”
A spokesperson for crypto policy think tank Coin Centre noted that the nonprofit is considering taking the matter to court since it believes that the core argument prohibiting the platform from operating is unjustified. Not only that, but the independent body also believes that the Treasury’s actions may have exceeded its statutory authority.
Was Tornado’s forced shutdown unconstitutional?
In a recent interview with Bloomberg, Jesse Powell, CEO of digital-asset exchange Kraken, argued that the Treasury Department’s actions to shut the Tornado Cash could be “unconstitutional,” stating that people have a right to privacy and thus, it will be interesting to see if the regulatory body’s assertions can hold any sort of ground in a court of law. He further stated that the subsequent removal of Tornado’s native code repositories was a “totally unnecessary step.”
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Following the sanctions, USD Coin (USDC) stablecoin issuer Circle decided to block all Tornado Cash addresses, to which Powell reacted: “Having a digital currency that’s so controlled and able to be controlled by maybe unconstitutional government action is a little bit scary.”
Kenny Li, co-founder and core developer for Manta Network — a privacy-preservation protocol — told Cointelegraph that the Treasury’s decision to sanction Tornado Cash is far-fetched and extreme even though in the past, certain individual crypto wallet addresses have been subject to the same treatment. But, in most cases, he said, there was a clear case of fraud, hacks or a Ponzi scheme:
“In this case, smart contract addresses are being blacklisted. Smart contracts aren’t people. Not only that, but people forget that Tornado Cash is a protocol, not a person or an entity, which means it will continue to run regardless of the sanctions. It is time that we realize privacy and anonymity aren’t the same, and Web3 is all about privacy.”
On the subject of people moving their USDC to other stablecoins following Circle’s decision to block Tornado Cash wallet addresses, Li noted that, unfortunately, there has been an increase in the number of platforms blacklisting wallet addresses maintained via Tornado Cash.
He pointed out that the move was due to Circle’s status as a regulated platform, thus obliging it to comply with any sanctions issued by a government body whose jurisdiction it operates under.
Lastly, he believes that Circle’s actions of blocking the movement of millions of dollars worth of USDC can potentially inhibit innovation within this space. Li concluded:
“No one wants their funds to be blocked, especially for activities they aren’t involved in. That said, there’s no certainty that tomorrow Tether won’t block addresses that have touched Tornado Cash. Ultimately, this action from the Treasury will likely instigate a domino effect, most of which is yet to be felt.”
Human rights violations brewing?
One aspect of Pertsev’s detention that has drawn public attention is that since his arrest, he has reportedly been denied visits of any sort, including those from his wife, Ksenia Malik.
In recent correspondence with Cointelegraph, Malik said, “He’s kept in prison as if he were a dangerous criminal,” despite simply “writing open source code.”
With Dutch authorities continuing to bar any contact with the outside — not even “one short call” — several rallies are being organized to support him. Decentralized finance aggregator 1inch tweeted that the arrest stands to establish a dangerous precedent, one that could potentially “kill the entire open-source software segment” if developers are continued to be held accountable for any misuse that emanates as a result of the software they create.
Decentralized finance aggregator 1inch tweeted that the arrest stands to establish a dangerous precedent, one that could potentially “kill the entire open-source software segment” if developers are continued to be held accountable for any misuse that emanates as a result of the software they create.
1/ Is it really a crime to be an open-source #blockchain developer nowadays ⁉️
Stand up for the right to build open-source software!
Help Alex Pertsev get out of jail!
Sign the petition: https://t.co/r5sdHaYKCN#FreeAlex #OpenSourceNotACrime #DeFi
Why is it important⤵️ pic.twitter.com/CqqD4Ds8AQ
— 1inch Network (@1inch) August 18, 2022
Despite the heartfelt sentiments of the open-source development community, it is pertinent to highlight a recent report from blockchain security platform SlowMist, which found that approximately 74% of all funds stolen from the Ethereum network over Q1 and Q2 of this year made their way to Tornado Cash, with researchers noting:
“The platform accounts for most of the initial funding for these security incidents. There have also been reports of withdrawals from exchanges, trading platforms, and personal wallets to fund these security incidents.”
Lastly, it should be noted that despite the outpouring of public support for Pertsev, his arrest hasn’t been entirely disapproved of by members of the global finance arena. For example, in a recent interview, venture capitalist Kevin O’Leary stated that platforms like Tornado Cash — which are advertised as “privacy tools” — have created a culture where it is fine to tinker around with federal regulations.
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In his view, Pertsev’s arrest was necessary and that it’s fine to have “sacrificed him” because it will, in his view, help introduce a high degree of stability within the market in the long run.
Therefore, moving forward, it will be interesting to see how legal issues such as these continue to be dealt with by regulatory agencies across the globe.