Tornado Cash Verdict: A Chilling Effect on Crypto Innovation?

Guilty. The announcement shook the crypto world like a tectonic shift. While the jury couldn't agree on the more serious money laundering and sanctions violations, the conviction for operating an unlicensed money-transmitting business sends a clear and unsettling message: build privacy tools at your own peril.

Privacy Is Not A Crime?

Are we actually pretending that writing code should be treated as a crime? That developing innovative tools that anyone with bad intentions can misuse means you should be held accountable for the actions of these bad actors? Where do we draw the line?

Think about it. Should the creators of encryption software be responsible when criminals go plan a bank heist over an encrypted messaging app? Or should we be asking whether auto manufacturers can be held liable when their vehicles are used in bank robberies? The answer seems obvious, doesn't it? The DOJ’s case against Storm crosses that line, quite perilously.

Yet, in the prosecution’s view, privacy was merely a “distracting cover story” for Tornado Cash. But isn't privacy a fundamental right? I mean, isn’t it the kind of thing we should be aiming for, given the growing ubiquitous surveillance of our lives? The irony is palpable: in the name of fighting financial crime, are we sacrificing the very principles of freedom and innovation that make crypto so compelling?

Innovation Suffocated By Fear?

This verdict doesn't just affect Tornado Cash. To be clear, this casts a long shadow over the entire open-source development community. If not, developers might understandably hesitate to create safety-enhancing technologies, fearing they’ll be penalized for how others choose to abuse their inventions. This chilling effect could prematurely end innovation on the very issues where innovation is most sorely needed.

Consider decentralized finance (DeFi). For DeFi to ever become the dominant force over traditional finance, strong privacy solutions are necessary. Just picture all of this sensitive business transacting on an open, public and totally transparent blockchain. That’s just not sustainable or practical across multiple use cases. Tools such as Tornado Cash, imperfect though they may be, are a noble effort to fill this dire need. To cripple the creation of such tools is to hamstring the entire DeFi ecosystem. It’s as absurd as making hammers illegal because a few criminals use them to smash windows.

We need to be honest: Crypto is still the Wild West. There are bad actors. There is illicit activity. The solution isn’t to go back to square one. It’s to create smart, targeted regulations that solve the problem without killing innovation in the egg.

A Shift In Political Winds?

The DOJ originally considered prosecuting Storm for failure to register as a money transmitting business. They ultimately chose to dismiss that count altogether. Why? Due in part to a DOJ memo directing an end to prosecutions related to regulatory infractions with digital assets. This points to an ongoing fight within, an acknowledgment that maybe this is going too far and getting too heavy-handed.

Let’s be honest, the politics environment is everything. Now, picture a scenario in which, under a new administration, maybe one more open to a hands-off approach, these rules are rolled back. Might we be witnessing a change in regulatory priorities? How can we produce an ecosystem that encourages innovation? Instead, let’s give these developers the freedom to create responsible privacy tools that don’t come with the threat of prosecution following them. But it’s not all pipe-dream wishful thinking, there may be real hope there.

As the Blockchain Association is already petitioning, this law should be amended to eliminate the obligation of unlicensed money transmitters. They see this as “regulation by prosecution.” They are right!

The conviction of Alexey Pertsev in the Netherlands adds to this global nature of the crackdown. Samourai Wallet, another privacy-focused project’s cofounders have recently pleaded guilty. This joint effort seeks to raise the bar for privacy protections in the crypto realm. We need to be vigilant as to what the effects of these changes will be.

What happens when innovation is stifled? What’s the cost when developers are too scared to build. What happens when privacy becomes a crime?

These are not just hypothetical questions. These are the more insidious, if less visible, threats created by the Tornado Cash verdict. We need to have an honest discussion about the tradeoff between security and innovation, and we need to do it now before such a measure is adopted. We can’t secure our financial future at the cost of our personal privacy and civil liberties. Let’s protect the future of cryptocurrency in all of this rush. It's time to stand up for innovation. It's time to demand sensible regulation. It’s not too late to save the future of crypto.

This isn't just about Tornado Cash. It’s not about the soul of the crypto industry.