Privacy, Crime and Tornado Cash

A new battleground is opening in crypto around the necessity of privacy, and how to go about securing financial confidentiality when using a public blockchain.

A distinct feature of cryptocurrencies is that activity on the blockchain is transparent, but if crypto is to gain mainstream adoption as usable currency (or as some other kind of practical tool) then privacy is a concern. Most people, after all, don’t want their monetary transactions to be publicly viewable.

In the case of traditional financial services, this isn’t a cause for concern. The service provider is handed responsibility for security and confidentiality, and we leave it at that. On a decentralized network, though, there is by design no provider to entrust.

Conflating Privacy and Crime

A desire for privacy is normal and not something we would baulk at when it comes to traditional banking. However, in the debate around crypto, a sleight of hand has been pulled by those equating crypto privacy with suspicious or criminal activity.

The argument goes that crypto confidentiality is dangerous, since crypto is used for illegal activity including money laundering, and any attempts at enabling privacy in a decentralized manner must themselves be prohibited.

This fails to take into consideration that the most non-traceable, easily concealed medium of exchange is cash itself, which can be physically handed from peer to peer, and traded for goods and services.

It is an argument that ignores the straightforward facts showing that crypto is used for illicit activity significantly less than fiat currencies are. Analysis going up to 2020 showed that less than 1% of crypto transactions are illicit, the majority of that illicit activity is crypto fraud, not money laundering, and the majority of criminal economic activity goes through traditional financial mechanisms, not crypto.

Arguing that crypto is inherently tainted through association with crime is akin to arguing that, for example, kitchen knives are a bad thing since they are occasionally employed for violent acts while ignoring the presence of chefs.

One might ask, if crypto is untenable because it has been used for illicit ends, then why is cash given a free pass? But then, keep in mind that these debates come at a time when governments are seriously assessing the viability of CBDCs.

Or to put it another way, some of the people who don’t like crypto, don’t like cash either and would like to implement centralized digital currencies that can be surveilled and micro-managed by the state.

Tornado Cash and GitHub

In the United States, the Department of the Treasury’s Office of Foreign Assets Control has sanctioned Tornado Cash, a crypto mixer service that allowed users to obscure their crypto transactions. Following on from that, it was reported that code hosting platform GitHub had suspended the account of a Tornado co-founder.

It is certainly true that Tornado Cash can and has been used for money laundering, including by North Korean state-sponsored hackers. However, to focus solely on criminal cases overlooks Tornado’s use by private citizens to uphold their individual rights to economic privacy, and the fact that the tech tool itself, open-source code, is a neutral object.

If a privacy tool is banned, then it seems the argument for doing so comes down to little more than prohibiting privacy for everyone because a small number of criminals can benefit from privacy.

Although the details are modern, involving blockchains and smart contracts, the base disagreement is an old one, coming down to matters of individual rights and state overreach, and in which the authorities are issuing a rehash of historically well-worn and debunked nothing to hide, nothing to fear modes of thought.

A Timely Debate

Silicon Valley and the tech world are rediscovering the importance of liberal values, and the dangers of government overreach. Early web pioneers in some ways exemplified what would now be called libertarian ideals, prioritizing the freedom to interact on one’s own terms and without oversight.

This ethos has faded though, as the handful of platforms that dominate the web exercise intrusively top-down control over user activity, particularly on social media. One side of the debate might state that this is all just content moderation, and an exaggerated complaint, as private entities are free to manage their own products and services as they please.

However, regardless of whether or not that argument is accurate, it doesn’t correspond with some people’s own perceptions of the current state of affairs. A growing number of users perceive politicized content control in which tech platforms act as outsourced town square gatekeepers.

Again, whether or not this reading is accurate is secondary, as the key point here is that if enough people perceive the current state of affairs as censorious, or simply sub-optimal, then there will be a hunger for something different.

And, it may now be crypto that can help to achieve a meaningfully different outcome. Perhaps this is what that nebulous term, web3, will come to mean, as blockchain-powered decentralization branches our online activity away from the existing web structure towards something less controlled.

Web tech, once optimistic and anarchic, has let itself be nudged bureaucratically into a surveillance mindset, and as a naturally evolving counter to that drift, crypto could not have come along at a more opportune moment.

Crypto is potentially many things: a store of value, a set of decentralized currencies, a borderless payment rail. Currently, though, we see another angle come to the fore. With surveillance and deliberately restrictive protocols having gained strength, it’s crypto that is now probing for alternative solutions by which to revitalize privacy and individual freedoms.