Welcome to Bloomberg Crypto, our twice-weekly look at Bitcoin, blockchain and more. If someone forwarded this to you, sign up here. In today’s edition, revisits mixers, sanctions and what’s a crime or not:
Tornado Cash is caught in a DeFi whirlwind
The news that a suspected developer for cryptocurrency obfuscator service Tornado Cash was arrested in Amsterdam last week triggered outrage across the cryptosphere, with opponents to the arrest arguing that a single person cannot be held responsible for crimes carried out using their code.
In reality, it’s not the first time authorities have made a move like this. But because of how crypto has changed in recent years, it raises some potentially thorny issues.
In case you missed the furor, the arrest came after popular crypto privacy tool Tornado was hit with sanctions by the US Treasury Department on Aug. 8 over its alleged facilitation of more than $7 billion in money laundering, including some $450 million by North Korean hackers.
Tornado, which mixes your digital tokens with those of other people to obscure transaction histories that otherwise would be fully visible on the Ethereum blockchain, has become infamous for its use by criminals to hide their loot in several of this year’s biggest crypto hacks. Its proponents say it’s a crucial tool for achieving true financial privacy, a core objective of many crypto diehards.
Others who ran privacy mixers have found themselves on the wrong side of the law in the past. The US assessed a $60 million penalty against Larry Dean Harmon, the founder and operator of Bitcoin mixing tools Coin Ninja and Helix in 2020. European authorities shut down a different Bitcoin mixer in 2019.
What sets the Tornado legal saga apart, though, is that the software uses open-source code, like most other decentralized-finance protocols. That makes it difficult to identify any one individual responsible for how it works, since different developers can help shape it. DeFi was still in its infancy back when the US government moved against Harmon.
It also raises the question of whether it’s considered a crime to develop code that is then used for illegal purposes, and more specifically, whether how the code is written could reveal the developer’s — or developers’ — intent to that effect.
The specific charges against the arrested Tornado developer have yet to be made public. But while the freedom to create and distribute open-source code is protected in many jurisdictions, Dutch authorities said they suspect the persons behind Tornado made “large-scale profits” from the criminal transactions conducted on the platform.
In essence, Tornado’s own code could be the key to determining if this really is an attack on open-source development — or the same old story as the banned mixers that came before it.
Charting it out
Hearing them out
What we’re reading (and writing)
- Crypto Rules Crackdown Looms for $150 Billion Stablecoin Market
- Alex Mashinsky Took Over Celsius Before Bankruptcy (Financial Times)
- Largest Bitcoin Miners Lost Over $1 Billion During Crypto Crash
- Deposits Gyrate at Crypto-Tied Banks (Wall Street Journal)
- Crypto Says Institutions Are Back, Though Retail Has Cold Feet
- Novogratz’s Spurned Takeover Target Seeks Termination Fee
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— With assistance by David Pan, Vildana Hajric, Yueqi Yang, and Anne Cronin