Tornado Cash Sanctions Beginning of DeFi Nightmare?

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued sanctions against Tornado Cash last week , marking its first action against decentralized finance in what could prove to be a watershed moment for DeFi regulation. The impact of compliance with sanctions is starting to spread across the industry, raising questions about decentralized compliance.


Some DeFi protocols like Pocket Network, Aave, etc. have decided to screen and block addresses that interact with Tornado Cash as people grapple with the impact of Tornado Cash sanctions. Now that the initial shock has subsided, the crypto community is starting to study what the real impact will be. People are losing – and then regaining – the ability to interact with the front end of a DFI project, depending on whether they interacted with Tornado at some point in the past.

Should the front end block any and all addresses that might interact with Tornado Cash addresses? Or should they be more specific and only block transactions that can be bound directly to sanctioned addresses? While we know that Tornado Cash and its developers’ GitHub accounts have been suspended, and at least one developer has been arrested, do the sanctions have an impact on Tornado Cash itself?

The debate revolves around that Tornado Cash is a protocol that developers have no control over and that can run autonomously. While U.S. entities or entities doing business in the U.S. can and should make every effort to avoid using Tornado Cash addresses, it seems that no one can easily force everyone to stop using Tornado Cash now. Those without access to Tornado Cash include Americans who used Tornado for legitimate purposes before last week, and their funds could be frozen forever unless the Treasury Department allows them to withdraw.

Crypto Community: Tornado Cash Sanctions Can’t Stop Bad Guys, Ordinary Users Are Locked Out

DeFi Education Fund policy director Miller Whitehouse-Levine tweeted that he intends to ask the Treasury Department to create a general license that would allow compliant users of Tornado Cash to withdraw their funds. “People want to be safe and not regret it, and the Treasury has a responsibility to explain what people need to do to keep them safe,” he said.

In a blog post, Coin Center ‘s Jerry Brito and Peter Van Valkenburgh said that if a general license is not issued, Americans may try to challenge the move. One concern is the unilateral freezing of American property without due process.

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Digital rights and privacy group Electronic Frontier Foundation (EFF) tweeted that it was concerned about the sanctions, noting that Tornado is an open-source software project. Crypto think tank Coin Center went a step further, saying that a legal challenge could be filed.

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Getsqt, an anonymous product manager at Espresso Systems, the team behind the privacy protocol Configurable Asset Privacy, believes that OFAC’s blacklisting of Ethereum smart contracts would compromise the privacy of normal users, while doing “little to do nothing” to stop bad actors. He said: “When applied to these tools, innocent users are inevitably affected. Not only that, but from a law enforcement perspective, the tool is built on a decentralized platform run by nodes from all over the world, even Arguably ineffective, Tornado Cash is still processing large amounts of money.”

Rune Christensen , founder of MakerDAO , the decentralized autonomous organization behind the DAI stablecoin, warned that the DeFi ecosystem should prepare for a more adversarial relationship with regulators. He said on CoinDesk TV that the U.S. Treasury Department sanctions may be ushering in a “new era of DeFi.” As an “extreme” precaution, Christensen floated the idea of ​​decoupling DAI from the dollar, such as Maker could hold the vast majority (over 75%) of its funds in ETH, which, after the merger, could be a kind of A “very attractive” and fairly stable asset that also pays interest, but ultimately it’s up to the DAO to decide what to do. He noted that some community members are increasingly skeptical of plans to integrate “real-world assets.”

Frontends can be monitored, deleted, hacked, or blacklisted without affecting what’s behind them, and there’s another way to deal with sanctions situations, and that’s by reducing the importance of frontends.

Prominent crypto personality Eric Wall tweeted: “I’m so outraged at Aave censorship front end. I see people refusing to understand the obvious, which is: censorship, compliance, can’t say the government what they did wrong. Our job is to make sure There are alternate backups to access the backend. This is easy to do, requires little coordination, and requires no cooperation from Aave. In this way, DeFi can work unabated – development teams don’t need to eradicate their entire existence to keep delivering code and no one is left out of access. Complain when the backend is reviewed, not the frontend”.

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Reddit user James_pic noted: “Other nodes are unlikely to ban it. As far as I know, there is no widely used ban mechanism at the transaction level, and I don’t see one emerging as most node operators have no reason to care about Aave’s Compliance requirements. As far as I can tell, the block is purely on the official web frontend (very centralized). Part of the fun of the immutable code is that they can’t add blocklists to the backend. Users just don’t have access to what’s centrally managed by humans Front-end websites, but if they’re willing to put in enough effort and know how to do it right, they might still be able to interact directly with smart contracts.”

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Centralized node infrastructure is one of the biggest threats to the web3 ecosystem. Messari analysts tweeted that the two largest node infrastructure providers, Infura and Alchemy , both disabled the RPC links used by the Tornado Cash frontend. RPC is an application programming interface (API) interaction that allows applications to communicate with servers on a shared network. Protocols such as Ankr and Pocket aim to provide decentralized alternatives at a lower cost with virtually zero downtime. However, their off-chain relay distributor mechanism operates centrally and creates a single point of failure. Despite relaying nearly 3x more RPCs than Pocket, Ankr suffers from similar centralization issues as Infura and Alchemy and has yet to resolve them.

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A watershed moment in DeFi regulation

Perhaps unsurprisingly, the industry lacks responsiveness and regulatory readiness. However, if DeFi leaders don’t face the reality that regulation in this space will only increase, its growth potential will be threatened. Taking steps to cooperate with regulators is the only way out for now.

OFAC’s action against Tornado Cash sends a clear message to everyone in the space: DeFi is now firmly on the radar of regulators and cannot escape regulation.

History tells us that regulatory scrutiny will only accelerate now, which is inevitable. Regulators are not motivated by malicious intent. They are just following the very delicate line of curbing crime without eliminating the positive potential of DeFi.

To prove it, a report by the Financial Action Task Force earlier this year noted that cross-chain bridges facilitate DeFi, but also allow criminals to exchange funds faster, creating money laundering risks.

If DeFi developers want their projects to be successful, they need to seriously consider working with regulators to address compliance issues.

In its statement about Tornado Cash, the U.S. Treasury Department said that it “repeatedly failed to implement effective controls designed to prevent it from regularly laundering money for malicious cyber actors and failed to take fundamental steps to address its risks” and that comprehensive compliance Sexual agreement is now a requirement.

Fortunately, some in the industry are aware of this reality, and several DeFi projects have begun implementing compliance controls in response to regulation. However, this preparation is far from widespread, which is a concern for anyone hoping to see a competitive DeFi ecosystem in the future.

The integration of DeFi into the mainstream is now inevitable, and highly regulated institutions see compliance as a prerequisite for participating in the DeFi space. They won’t fully embrace the field until they are confident that the field is compliant with regulations.

The Tornado Cash incident showed that the costs of failing to incorporate regulation into DeFi development are now too great to ignore, and compliance activities inevitably come with costs. Only those who actively seek to comply with regulatory compliance when building the DeFi ecosystem will be on the road to success when everyone else is eliminated.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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