The decision of Circle to follow US government sanctions and blacklist Ethereum-based users of Tornado Cash sets a dangerous precedent for the entire cryptocurrency industry.
That is the view of Marius Ciubotariu, co-founder of Hubble Protocol, and Stefan Rust, CEO of Laguna.
The US Treasury Department has imposed sanctions on Tornado Cash, a cryptocurrency ‘mixer’ which says it protects users’ privacy.
It is alleged that Tornado Cash has helped launder more than $7 billion in stolen crypto funds since its inception in 2019. USDC and ETH addresses connected to Tornado Cash have been sanctioned, while links to its GitHub account and website have been taken down and its email disabled.
Circle, the issuer of the USDC stablecoin – which is pegged 1-to-1 to the US dollar – followed this by freezing more than $75,000 worth of funds linked to the 44 Tornado Cash addresses sanctioned by authorities.
“Circle’s decision to follow along with the US Treasury and ban users of Tornado from buying or selling USDC tokens is an extremely worrying development that threatens the integrity of cryptocurrency, and decentralised finance in particular,” said Ciubotariu, whose business is a financial platform for decentralised finance services on the Solana blockchain.
“An estimated $437 million of assets have been blocked as a result of this decision, one that will surely impact all manner of users of the cryptocurrency mixing service. More importantly, though, it underlines how dangerous it is to have one centralised company managing over $54 billion of assets in crypto.”
Citing the collapsed Terra-issued UST stablecoin, he continued: “The UST fallout has made clear how important it is to have real asset-backed stablecoins. However, real asset-backed stablecoins that are subject to the whim of draconian US sanctions do not, arguably, provide the type of security that holders of the USDC token would like.
“The precedent that this could set for the future of Ethereum Virtual Machine (EVM) smart contracts is also alarming. In the future, we could see these contracts written with an opt-in clause that would allow node validators to decide not to process a transaction due to a black/watchlist. Essentially, this puts validators in a position where they act as a proxy for regulators.
“As a project, cryptocurrency is designed to be a departure from the negative aspects of traditional finance, which frequently restricts access based on sweeping policies that often don’t serve the majority of people using it.
“By giving power to regulators, we are stifling cryptocurrencies’ emerging ability to sanction bad actors internally by catching hackers and criminals as they move around, attacking them back, or reporting them to the authorities.”
Rust, CEO of the Laguna blockchain – aiming to create a DeFi ecosystem – agrees that the move by Circle is an “extremely dangerous precedent and should be a wake-up call for everybody working in the cryptocurrency industry”.
He explained: “While much is being said of Tornado’s links to the North Korean state-backed hacking group Lazarus, the likelihood that North Korean users make up anything more than a tiny fraction of a percent of Tornado’s users is small.
“In reality, USDC is reacting directly to the wishes of the US Treasury Department… this has effectively made Tornado Cash illegal in the US.
“The fact that blacklist capability can be (and is) written into Ethereum Virtual Machine (EVM) token contracts is a huge vulnerability and point of coercion for the state. On the Bitcoin network, individual nodes can blacklist a Bitcoin address, but they risk forking themselves off of the network if they don’t have the 51% of hash power to enforce it.
“With an Ethereum smart contract, tokens in a blacklisted address simply cannot ever be moved because the contract will fail if a transfer from that address is attempted. Right now, any user that has sent funds to a newly-banned Tornado smart contract finds themselves locked out of their USDC forever.
“People warned about the consequences of this feature being added to the USDC contract from day one. Now we have a centralised company at the mercy of US regulation running the fourth largest cryptocurrency in the world – and over $55 billion of market cap is on the line.
“This is truly a scary move. Imagine having a business where your closest competitor could shut you down by adding one row to a database it has complete control over?”