Are All Crypto Privacy Services Potentially Criminal?

experience of using a decentralized app called Tornado Cash. Tornado Cash is something known as a mixer, which is a service that allows people to obfuscate both the origin and the output of certain kinds of crypto transactions. It helps with privacy and with anonymity, But federal regulators say cyber criminals, of course used services like Tornado Cash for money laundering purposes, and as a result, Tornado Cash was recently hits with sanctions by the US Department of Treasury. Now, privacy is

a key objective of many crypto proponents. It's one of the things that's really important and often makes the asset class attractive to certain kinds of investors. If this principle can't be guaranteed, then crypto's utility for folks who care about privacy becomes more questionable. Today I'm joined by Bloomberg crypto blogger Emilina Cole. There's no real regulatory o of a sight yet of what's happening on these exchanges, and we'll discuss whether or not the centralized service can truly

be regulated and what the issues are surrounding crypto and privacy. So, tornado Cash, this is a this centralized protocol that allows transaction mixing. There's a lot of attention on it right now. Let's start by explaining all three of those things. What is tornado Cash, what is mixing in crypto, and why are folks currently talking about it. So tornado Cash is

a platform that runs mostly on the ethereum blockchain. What it does is it allows users to send their ethereum tokens to tornado cash, and while they belong to tornado cash, theory and a kind of part where it's mixing it around and jumbling it up with all the other ethereum tokens that have incentive Tornado and then eventually we know once you take them back out again. It helps to

obfuscate the transaction history of those tokens. So if you were somebody who's particularly concerned about financial privacy, you might find Tornado Cash a really great to all for that because it helps to obscure the public nature of the blockchain. But if you were also somebody who might have gotten those tokens through illicit means, shall we say, um, it

helps cover your tracks there as well. It sounds like this is one of those classic situations in crypto where the thing that makes it useful, interesting, attractive, especially to privacy proponents, also makes it useful, interesting, attractive to people who might be accused of criminal or otherwise nefurious behavior. Is that kind of a reasonable assessment of the world. Yeah, pretty much, and it's it's one of the reasons why

we're talking about it today, right. So the US imposed sanctions on Tornado Cash in August, and the reason for that was that some of the activity that had been happening on Tornado Cash had been illicit, and they'd had evidence that hackers in North Korea had been using it to launder their stolen cryptocurrency in a way that was made it more difficult for investigators to track them, and because of that North Korean link in particular, that made

it not just you know, like an illegality target for US authorities, but also a political one. When we generally talk about the US or other government sanctioning somebody, and there's been a lot of sanctions to go around since Russia invaded Ukraine, it tends to be against like knowable

named legal entities, a person, an organization, a company. Tornado Cash is a software protocol, like what in what has it meant to sanction a piece of software in practice and what are some of the issues that have arisen

as a result. So back in March, my colleague and fellow reports and she interviewed the founders of Tornado Cash, and at the time they said, it's not technically possible to sanction a blockchain protocol like Tornado because technically it's a piece of technology and being in blockchain, not one person controls it. There is you know, a direct company that you can say they're in charge, they're operating it, they're the ones responsible for everything that happens on it.

It's built through open source code, which means multiple developers are contributing to it, and supposedly, according to the founders, community of people are the ones running it and operating it. So just because a group of people built it in the first place, that doesn't necessarily mean you can point the finger at them and say they're the ones responsible

for it. Um But as things have gone on, the reasons why these sanctions were able to be enforced is because eventually what happened is that other providers who serviced Tornado in different ways that weren't to do with the

blockchain's day to day operations. So you know, the email addresses of people who worked on it, or the website that you would visit to go to Tornado Cash, these were things that were run by centralized providers US companies that had rules and laws that they have to abide by, and so Tornado is a sanctioned entity, they can no longer do business with them. Those services went down, and

therefore Tornado became effectively sanctioned. Well, it wasn't only the services went down, was that those providers kicked Tornado and any individual founders developers that they could identify off of those services. Right, So it's the way that these actions work. It's not that there's like a magic button that the US or other government can press and these things happen. It's the organizations involved have to take active steps, and

they absolutely did those things. So, you know, tornado Cash. You can no longer find the server for tornado cash on discord, which is kind of like a chat platform. You can no longer find, as you said, their code hosted on services like GitHub. You can still find their code hosted in other places by other people, which I think speaks to what you were alluding to in terms of the decentralization of the thing itself, even if its

services were centralized. Yeah, and it's one of the reasons why, even in the immediate aftermath the sanctions, everyone was wondering, why, you know, if we can't look at the code on something like get hub, how will we find out who might have actually been in charge of this, or whether the found this could have profited from Tornado Cash and therefore have some responsibility for its ongoing maintenance. But thankfully, I guess for US authorities, those things were uploaded elsewhere.

And it's part of the narrative around crypto is that if one thing is built somewhere and it's not controlled by any particular ensity. What's to stop that being replicated? What's to stop someone building that Tornado cash again under a different name for everybody to use. Crypto loves acronyms, And there's one that I encountered fairly recently, which is dino or d I n O, which is decentralized in name only, which is kind of an increasing criticism of

so much of the fundamental infrastructure of crypto. You know, it's applied to everything from the folks who are like Web three is great, and then you you know, poke a little bit harder, and it's just a bunch of Web two companies that have like Web three skins. It's things like Tornado cash, where even if as we've said, this protocol could be hosted in lots of other places that really relied on a centralized infrastructure for every from

its email hosting two, it's actually called repository. What are the alternatives here? Right? If if you are a person who is serious about maintaining your privacy, having some degree of freedom from government interference or resistance to censorship, what does the presence and the future potentially look like for you? So Tornado wasn't the only crypto mixing tool out there, and there are others um So, so that's like an

immediate one. But if we're thinking about ways that you can kind of step further away from the centralization and step further towards something that possibly couldn't be sanctioned or would have more difficulty in it anyway and being taken down, the first thing is privacy coins. So there are cryptocurrencies like z cash, if you'll excuse my British accment with the zed um and minero um, which are slightly different to other tokens, and that they helped to obscure that

pathway a little bit more. The only thing is with those cryptocurrencies is that are not widely accepted. You're not going to be able to do as much with a token night minero or zaid cash as you would be with an ether token, so you're a little bit more

limited in that way. Coming up more from my conversations with Emily Nicole about how the wider crypto community has responded to the sanctions against tornado Cash, one follow up question for you, Emily is, and I'm just going to say this thing that I say all the time, which is, you know, everything old is new and crypto and one of the oldest tensions is this tension between this idea of if you want perfect privacy protections, you have to

allow a certain amount of criminality right where it's like, if something is really good at protecting your privacy, then it's definitely going to be used by criminals. That is, you could argue a dramatic oversimplification, but in a lot of ways, that's also the conversation that folks are having in crypto right now. Where are people landing on either

side of this question? If you think about what the broader financial world looks like, there's an element of criminality and all of it, right, so be naive to think that you could feasibly remove criminality from every aspect of it.

But what concerns people the most is that there's no real regulatory oversight yet of what's happening on these exchanges or on these platforms, particularly ones like Tornado Cash, which don't really have like you know, a jurisdiction or a company office that you can point to and a CEO

that you can bring in front of the Senate. And so that's one of the concerns is that like, if you can't have any oversight at all or have anybody that you can point to as responsible with figure than than what roots are left to you in order to

be able to shut those things down. Right, So this is essentially the argument that in order to have privacy, you actually need some amount of centralization, Like somebody has got to take one for the team and you know, be the entity that could get in trouble if you know, bad things are happening and regulators or other enforcement agencies

are trying to crack down on those bad things. Yeah, I think we're seeing it more and more now that crypto people who have espoused the benefits of decentralization to like the nth degree and now starting to say things like, oh, well, you know, we'll never be able to have full decentralization. We have to aim for the best amount that we can possibly get because we're never going to be able

to do the actual full thing. And you'll even see CEOs of major crypto exchanges say this now, whereas you know, maybe a few years ago you might have seen the full like Bitcoin rally wammy of centralization is dead and everything is is defy in future, and so as that kind of narrative changes and people have to start thinking about this differently, it will be interesting to see what tools the crypto enruy tries to come up with to

get around these centralization risks. In the aftermath of the Tornydo cash sanction and the subsequent arrest of this developer outside of the United States, a lot of the conversation took on kind of a very you know, first they

came for Tornydo cash kind of till own. And there's this real kind of contrast between the well, I guess we've got we have to give up some freedoms to have some freedom's conversation and the folks who are you know, kind of fighting the fight that any slope is too slippery, right, that you have to have this really aggressive, assertive, fundamental

approach to defending against this. What recourse do those folks really have if they're attempting to kind of go up against governments, Whether or not it's possible for you, no crypto person to see something like the Department of Justice if they felt like they're being treated unfairly, I mean, you know better than I If there have been any successful examples of that, and I've bet there are a few, but there is definitely a thinking at least among the

crypto cognizanti that anything is possible. That's the dream of bitcoin, right The dream of crypto is that you can do anything if you put your mind to it, and that includes evading total government sanction or oversight. And if you live in the web long enough that maybe there'll be a way that your hoping could become completely out of sight and out of mind if the government were to

come knocking. They're always going to be people who are trying to outrun the attempts of people in positions of power, governments, state actors, non state actors, and then those governments, state actors, non state actors are going to be throwing often billions of dollars of the problem of keeping up with the people who are trying to outrun them, and there's definitely a feeling that that is starting to emerge in crypto

right now. The challenges the sums involved on the part of you know, the folks in crypto who really care about these are like they have way fewer resources than the governments who are equally keen to crack down. But then the governments themselves are also slightly on the back foot, right. It's always a you regulate out of existence rather than into existence, is one of the former UK regulators likes to tell me every time I ask him about crypto.

Um so, what they'll be thinking is like, you know, how can we regulate the bad stuff out of crypto rather than how can we regulate the good stuff in? Got it? Well, Emily, thank you as always for being on the show. You can find more of Emily's reporting on the Bloomberg terminal on Bloomberg dot com or follow her on Twitter. She's at Emily J. Nicole. That's E M I L Y G N I C O L L E. On the next episode of Bloomberg Crypto, El

Salvador is a year into its great Bitcoin experiment. On September seven, it became the first country in the world to accept the token as legal tender. What's happened since, Well, it's been a ride. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I heart Radio, visit the i heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions or suggestions for the show to Crypto

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