Tornado Cash BANNED By OFAC... Is this the War on Crypto?

On Monday, the U. S. Treasury Department made a smart contract illegal. They can do that?? David walks you through the news, with multiple interviews from Jerry Brito and Collins Belton, two experts in the matter. Let us know how you like the format! ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across 🏦 ALTO IRA | TAX-FREE CRYPTO https://bankless.cc/AltoIRA 👻 AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave ⚡️ MAKER DAO | THE DAI STABLECOIN https://bankless.cc/MakerDAO 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave ------ Topics Covered: 0:00 Intro Opening Shot: https://twitter.com/RyanSAdams/status/1556743328774995971?s=20&t=OzfqFxxolrjhwZICo4KV6w https://twitter.com/RyanSAdams/status/1556743328774995971?s=20&t=OzfqFxxolrjhwZICo4KV6w Ripple Effects: https://twitter.com/collins_belton/thread/1556650759994970113 Neutral Tool: https://twitter.com/jerrybrito/status/1556667240711438337?s=20&t=avKH9mQ1_3KDno2P2THs7Q https://twitter.com/jerrybrito/status/1556667240711438337?s=20&t=avKH9mQ1_3KDno2P2THs7Q 4:00 What is OFAC? Overview: https://home.treasury.gov/policy-issues/office-of-foreign-assets-control-sanctions-programs-and-information Press Release: https://home.treasury.gov/news/press-releases/jy0916 Sec Blinken: https://twitter.com/SecBlinken/status/1556677862345801728?s=20&t=QwqpNxU9CYKPz8LhBATSFQ https://twitter.com/SecBlinken/status/1556677862345801728?s=20&t=QwqpNxU9CYKPz8LhBATSFQ 7:44 What is Tornado Cash? Breakdown: https://blog.chainalysis.com/wp-content/uploads/2022/08/tornado-pie-1536x1034.png Treasury Misleading: https://twitter.com/USTreasury/status/1556655337431785472?s=20&t=Jw5y0Xr4fHSelCzfhWvYlQ https://twitter.com/USTreasury/status/1556655337431785472?s=20&t=Jw5y0Xr4fHSelCzfhWvYlQ Alex Svanevik: https://twitter.com/ASvanevik/status/1556983834809614337?s=20&t=OCDr5P9jRweG9RVYdmmxKQ https://twitter.com/ASvanevik/status/1556983834809614337?s=20&t=OCDr5P9jRweG9RVYdmmxKQ 10:20 Using Tornado Cash Neeraj Meme: https://twitter.com/NeerajKA/status/1556707552251060225?s=20&t=UNffL4gM4hBsaXDEZ0gJ_w https://twitter.com/NeerajKA/status/1556707552251060225?s=20&t=UNffL4gM4hBsaXDEZ0gJ_w Clean ETH2 Addresses: https://twitter.com/econoar/status/1556775153153048582?s=20&t=63-Nwh2Lv7u8tTC4E-CVUw https://twitter.com/econoar/status/1556775153153048582?s=20&t=63-Nwh2Lv7u8tTC4E-CVUw More Use Cases: https://twitter.com/RezaJafery/status/1556751888896258049?s=20&t=9rJ2buSh4PCTPMlNKezAyw https://twitter.com/RezaJafery/status/1556751888896258049?s=20&t=9rJ2buSh4PCTPMlNKezAyw 12:15 Banning Smart Contracts Coin Center Announcement: https://www.coincenter.org/u-s-treasury-sanction-of-privacy-tools-places-sweeping-restrictions-on-all-americans/ 17:08 Ripple Effects Circle: https://www.theblock.co/post/162172/circle-freezes-usdc-funds-in-tornado-cashs-us-treasury-sanctioned-wallets Github: https://twitter.com/bantg/status/1556721709931175937?s=20&t=LSCI_12-Giipv727Y52qUg https://twitter.com/bantg/status/1556721709931175937?s=20&t=LSCI_12-Giipv727Y52qUg Infura & Alchemy: https://twitter.com/0xdev0/status/1556933551073153024 20:55 A Ban on Who? Cobie & Gainzy: https://twitter.com/cobie/status/1556647650212155394?s=20&t=F8nhR0zX4PkbGGOl1JmBCQ https://twitter.com/cobie/status/1556647650212155394?s=20&t=F8nhR0zX4PkbGGOl1JmBCQ Depositing .1 ETH: https://twitter.com/josephdelong/status/1557011056572129280?s=20&t=F1JszlO7Zm0lm4EGsgBrNg https://twitter.com/josephdelong/status/1557011056572129280?s=20&t=F1JszlO7Zm0lm4EGsgBrNg 23:14 A Chilling Effect Attacking Free Speech: https://twitter.com/matthew_d_green/status/1556764387796340736?s=20&t=w8K19sEWj_AVS372HOjHTw https://twitter.com/matthew_d_green/status/1556764387796340736?s=20&t=w8K19sEWj_AVS372HOjHTw 25:47 Decentralization Priorities: https://twitter.com/econoar/status/1556825245381578753?s=20&t=63-Nwh2Lv7u8tTC4E-CVUw https://twitter.com/econoar/status/1556825245381578753?s=20&t=63-Nwh2Lv7u8tTC4E-CVUw ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Hoffman?

  Bankless Nation, DeFi is under attack.

• 0:04David Hoffman?

  On Monday, the Office of Foreign Asset Control, OFAC, banned Tornado Cash. What does it mean to ban Tornado Cash? Well, I'm glad you asked, because that's a really, really good question. Taking OFAC at face value, it means that they've added Tornado Cash to its specifically designated nationals list, a running tally of blacklisted people, entities, and cryptocurrency addresses. As a result, all US persons and entities are prohibited from interacting with Tornado Cash or any Ethereum wallet tied to the protocol. Those who do can go to jail. You can go to jail for touching Tornado Cash now. The reasoning behind this move? OFAC stated that "Tornado Cash has been the go-to mixer for cybercriminals looking to launder the proceeds of crime, as well as helping to enable hackers, including those currently under US sanctions,

• 0:49David Hoffman?

  to launder the proceeds of their cybercrimes by covering up the origin and transfer of this illicit virtual currency," meaning ETH. Since its creation back in 2019, Tornado Cash has reportedly laundered more than 7 billion worth of virtual currencies. Ryan, who's away on vacation, is calling this "the opening shot of Big Brother's assault on crypto." Collins Belton on Twitter, who is a fantastic crypto lawyer, said, "While I'm not surprised, this is arguably the most significant legal action that has occurred in crypto and could have absolutely gargantuan ripple effects for everything from dev liability to First Amendment implications of code publication." Jerry Britto of Coin Center said, "Today's action does not seem so much as a sanction against a person or entity with agency. It appears instead to be the sanctioning of a tool that is neutral in character

• 1:34David Hoffman?

  and that can be put to good or bad uses, like any other technology." Bankless Nation, this is a very special edition of Bankless. We're bringing you a new format today on the show. These two individuals who I just mentioned, Collins Belton and Jerry Britto, are interviewed in this episode. These interviews have been chopped up and edited into the various themes that this whole event has surfaced. Themes like, "What does it mean to ban a smart contract?" "What is the line that is being crossed by OFAC?" "Why is privacy so important even when it enables actors like North Korea to launder money?" "Where is the due process?" "And what effects will this have on DeFi app developers and US" like you and me and of course what we as an industry need to do about it you'll hear from Collins and Jerry jump in at a number of different places in the show as we navigate through this very hairy

• 2:20David Hoffman?

  but critically important topic the topic of user sovereignty privacy and decentralized finance but first before we begin a moment to speedrun through some of these fantastic sponsors that make the show possible Rocketpool is Ethereum's decentralized validator network where you deposit ETH and you get our ETH in return and you can take that our ETH into DeFi and if you run a node you let other people deposit their ETH into your node and you get to charge them 15% for staking rewards as payment for your node operating services and then you can take that our ETH and use the ACROSS bridge to join over 2.3 billion dollars in the Arbitrum ecosystem ACROSS of course is the fastest cheapest and most secure cross-chain bridge and one of the safest ways to bridge your hard-earned assets in the world of crypto

• 3:01David Hoffman?

  and of course Arbitrum is where you want to be with over 35,000 contracts and 1 million unique addresses Arbitrum is leading the way into the age of rollups you know how I know these numbers because I watched the Arbitrum's talk at ECC which you should also go watch but not before you're done watching this but when you do watch that video make sure it's on a privacy-first browser which is why you should be using Brave it blocks all the browser ads it's got a native Web3 wallet and it puts the user first the Web3 way you know what else puts the user first Ledger hardware wallets and the Ledger Live ecosystem I know Ledger is a great product because I have literally nine of them and I have 99% of my crypto assets on my Ledger wallets and the Ledger Live ecosystem is all you really need when it comes to living a bankless life such as buying with fiat swapping and staking

• 3:46David Hoffman?

  but for the rest of you that are sitting on stablecoins because the market is scary right now make sure you're using a decentralized bankless stablecoin may I suggest DAI from Maker DAO the most tried and tested stablecoin in existence but with Maker you don't have to hide your stables on the Ethereum Layer 1 Maker is building DAI portals so you can mint DAI natively across all the Layer 2s so you can make sure that your assets don't go down another 90% but you still get to go do all the DeFi things across the L2 verse Okay, first, we gotta start at the basics. What is OFAC and what did it just announce?

• 4:17Speaker 01

  Well, so OFAC is a Division of Treasury, right? So it's the Office of Foreign Asset Control within the Treasury Department. And it's basically charged with overseeing and managing all of the US's sanctions programs, right? So they're the Office of Treasury that manages that whole process, make sure that the public knows who's sanctioned, and make sure that the public is complying with the sanctions.

• 4:41David Hoffman?

  It's part of the Treasury, same organization as the IRS. And so it has to deal with money. And it makes sure that all of the people that are under its control as a United States citizens aren't doing things that undermine the power and legitimacy of the United States of America. And so, like I said, the IRS is part of Treasury, but also so is OFAC. And it basically just sets rules that we cannot break, that make sure that there's no such thing as weapons financing, like drug trafficking, blah, blah, blah, all the bad things. Important note, that they are not elected. Just like Treasury, they are not elected people. And so, this rule, this, it's not regulation, it's not a rule, it's just like a thing that is now something that we have to follow.

• 5:25David Hoffman?

  On Monday, OFAC releases a press release titled, "US Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash." Notorious, huh? Yeah, notorious for being awesome.

• 5:36Speaker 02

  Here's the thing, with a good privacy tool, of course criminals are likely to flock to it, just as regular human beings are likely to flock to it. The reason why you would do so is because it's effective. You're not gonna go to a tool that's known for having a backdoor or a hole and want real privacy.

• 5:53David Hoffman?

  Or maybe not awesome, but at least useful for the individual to achieve some level of privacy, albeit also useful for North Korea to launder a ton of money. Their press release reads, "Today, the United States Department of the Treasury Office of Foreign Assets Control, OFAC, sanctioned virtual currency mixer tornado cash, which has been used to launder more than 7 billion worth of virtual currency since its creation. This includes over 455 million stolen by the Lazarus Group, a North Korean state-sponsored hacking group that was sanctioned by the US in 2019, and the largest known..." Virtual currency heist to date. Tornado Cash was subsequently used to launder more than 96 million of malicious cyber actors' funds derived from the June 24 Harmony Bridge heist, and at least $8 million from the August 2 Nomad Heist, the one that just happened last week.

• 6:36David Hoffman?

  Their press release continues and says, "Today's action is being taken pursuant to Executive Order 13694, as amended and follows OFAC's May 6 designation of virtual currency mixer Blender.io, also known as Blender."

• 6:50Speaker 02

  Interestingly Blender, I actually went back to look at Blender sanctions, uh, sanctions announcement. Blender was another mixer that had a sanctions issue in May. And it's kind of interesting that they actually somewhat took this approach there. They actually just named the website Blender as an entity. But I think a lot of us assumed it was because we knew there was a company there and kind of understood Blender's model. Tornado is a little different in that, you know, they listed, you know, they essentially went to EtherScan, scraped a bunch of addresses, listed a bunch of them. And they actually, you know, interestingly, have not seemingly sanctioned the devs or the company behind Tornado Cash.

• 7:22David Hoffman?

  Secretary of State Brian Nelson says, "Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering money from malicious actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them." Okay, so now that we understand OFAC, what is Tornado Cash and how does it work? Tornado Cash is known as a mixer or a tumbler. There's a reason why it's called Tornado Cash. Imagine a bunch of cash circling around in a tornado. You don't really know whose cash is who. Tornado Cash has a bunch of pools. It has a .1 ETH pool, it has a 1 ETH pool, a 10 ETH pool, and a 100 ETH pool. And people would come and they would put denominations of whatever these bills are into Tornado Cash,

• 8:08David Hoffman?

  and they would just let them sit in the pool. And then at a later point in time, they would withdraw that same denomination from the pool. The cool thing about Tornado Cash is it uses fancy cryptography magic to give you what's called a note. So when you came and deposited 10 ETH into their Tornado Cash 10 ETH pool, when you did that, you would receive a note that you would like download and save to your computer. It's like a plain text file. And when you would come back to tornado cash at a later moment in time, you would return that note back to tornado cash. And tornado cash would know that this person has deposited 10 ether and they have not yet withdrawn 10 ether because I have not yet seen this note before. And then you deposit the note and then tornado cash gives you 10 ether back.

• 8:50David Hoffman?

  From the external standpoint, tornado cash just looks like a bunch of people are sending 10 eth in and then a bunch of different people are withdrawing 10 eth out. And there's no way to really connect who is who. So it was a way to achieve privacy with some of your ether. You could also use DAI, you could also use USDC, which is an important point of this story. Tornado cash was created by a Russian team, but I believe they actually live in America. And I've seen them at Ethereum Denver, I've seen them at ETHCC. They're a part of the Ethereum community, they're a part of crypto Twitter. They are not criminals, they are known people who just build open source software. Even though that they built tornado cash, they are actually not being targeted by OFAC, which is again, an interesting part of the story, which we'll cover later on. So who are the bad guys using tornado cash?

• 9:35David Hoffman?

  According to Chainalysis, $7.6 billion of ether has been tumbled through tornado cash since its inception in August 2019. Which really makes this tweet from the Treasury Department hit really hard. Because it's implying that every single dollar that flowed through tornado cash is illicit mundery laundering, which is not. I asked Alex Svanevik from Nansen this question, like how much of money going through tornado cash is actually illicit? And he said that 35% of funds that has been flowing through tornado cash that has been accounted for as some sort of DeFi hack or exploit that has used tornado cash for explicitly obfuscating and laundering money. Now that is not also including any sort of petty money laundering and tax evasion that people are probably also using tornado cash for.

• 10:20David Hoffman?

  I've used tornado cash, I've used it a number of times. Am I a criminal trying to hide all of my money? No, I'm a very public person and I have davidhoffman.eth. And if all of my crypto money was associated with davidhoffman.eth, there would not be a single transaction on Ethereum that I would be able to do in private. So I've used tornado cash to put ether into different wallets that I go do things. I buy a token, I trade an NFT, and I don't have to worry about crypto Twitter being like, whoa, David's buying whatever, whatever. I just don't want that weight on me. I do not want the eyes of the world watching what I get up to in my shenanigans on my off time. Thank you. General financial activity should not be public. You guys should not be able to see what I do, and I've used tornado cash to just have a little bit more privacy in my life. Here's a meme from

• 11:05David Hoffman?

  Niraj at Coin Center, which I thought summed this up pretty well.

• 11:10David Hoffman?

  Eric Connor also tweeted about how he's used tornado cash to just generate new clean addresses for all of his ETH staking on ETH 2. He just wanted a blank slate, so he can do the same thing, buy NFTs, buy tokens, just do general DeFi stuff without having the eyes of the world upon him. Reza tweets out, "Completely illegal until today, reasons to use tornado cash. You get paid in crypto, but you don't want your employer to know all of your financial details. Hmm, smart. Also, you pay for a service in ETH, but you don't want this service that you're paying for to see everything that you've ever done on-chain ever." These are all valid use cases for privacy, and now with tornado cash gone, we don't have any good ways to do this. If we can't hide our financial transactions from aggrieved parties who have control, then we

• 11:53David Hoffman?

  don't have freedom. A very critical part of this story is that tornado cash is not a typical thing to be added to the OFAC SDN list. Previously, all members of the OFAC SDN list have been people or entities, things with like an address or a social security number, what Jerry Brito calls "somebody with agency." Let's dive into this part of this conversation with Jerry Brito.

• 12:14Speaker 01

  SDN stands for Specially Designated National. Basically, it is the list of sanctioned people. In practice, the way it works is that financial institutions, so banks and things like it, certainly check that list. When you go through your KYC, when you're opening up an account in a financial institution, first thing they're going to do, among the different things they're going to check about you, is are you on the SDN list?

• 12:38David Hoffman?

  And up to this point, the SDN list has been people, and this entity is not a human. This entity is a bunch of smart contracts on Ethereum. Can you talk about the nuances that that brings? And is that really why this is such a big deal? Is the nature of the entity that is now on this SDN list?

• 12:59Speaker 01

  Yeah, basically at root, yes. I have not followed OFAC designations for decades to know that they've never Designated a non-human, but as far as I'm aware, that is the case, right? Typically, when somebody's added to the SDN list, it's a person, or a company, or some kind of group. So somebody with agency, right? Somebody that you can identify as a person that you, with intents, with motivations, and somebody who you can decide, you know, I'm not going to interact with this person. And we've seen in the past, a few months ago, when they sanctioned Blender.io, which was a mixing service, Blender.io was centralized. So it was a organization, right?

• 13:42Speaker 01

  What you have now with tornado cash is interesting because I think that they are, in some respects, identifying a group, or a group of persons, but then they are also identifying smart contracts. And they're putting all these things together, but they don't go together, right? So they, it's really odd. They say that tornado cash is sanctioned. I'm not sure what that means. I think, I think they could say tornado cash is a group of people. It's, you know, that provide a service. And so maybe we can, we can get into that, that is. But for example, they list a website. So clearly, if they're sanctioning this website, and we can get to later also about

• 14:27Speaker 01

  why they're sanctioning it, and what's the due process here, if any. But there's a website, and so clearly, if they're sanctioning a website, well, the website has somebody behind it, right? So that makes sense, right? But then, in addition to all this, they're listing a set of smart contract addresses, some of which are not under anybody's control. And so they are associated with the, you know, with the idea of tornado cash, but there's nobody there. There's nobody home, it's a robot. And I know this is hard, I think, for, I think you and the audience listening to this probably understand this exactly what I'm talking about. But I think it's hard to convey to some folks who are used to being able to say, "Oh, we can sanction or target Blender.io."

• 15:11Speaker 01

  They want to do the same thing to tornado cash, and... You know, quite honestly, at least through what's come out so far, ignoring the subtleties and nuances in the difference there.

• 15:24David Hoffman?

  And let's go into those subtleties because I think what people are really concerned about is, you know, perhaps many people are concerned about, I would like to be able to use Tornado Cash, so please don't ban that. But I think many others are also concerned as the precedent that this brings to the industry. Why is the precedent for this so massive? What are the implications of this?

• 15:46Speaker 01

  Essentially, what is happening here is that without any real due process, without any kind of input, by complete surprise, what Treasury has done here is that they have banned a particular application on the Ethereum network, you know, and really, you can't use it anymore. And if you read statements from Treasury, they will do this again and again. So in essence, they are banning, again, without any due process, without any consideration on the part of a legislature, et cetera, they are banning a class of software. And it's a class of software that, sure, I mean, let's not forget, it does have illicit uses,

• 16:28Speaker 01

  but so do cars, so does cash, so do banks, so do so many other things. It's because it's being done without any due process that it's really problematic because, you know, what's the next thing they're going to say is sanctioned?

• 16:42David Hoffman?

  A smart contract is a robot, not a person. It is software that resides on the Ethereum blockchain. If a contract is credibly decentralized, then the original offers of that contract could be hit with a bus and that service would continue to work. Today's action by OFAC does not really go after any person or entity with agency. Instead, it seems to be sanctioning a tool that is neutral in character. The ripple effects of this OFAC ruling have already been felt. Circle, the issuer of USDC, has immediately frozen the $75,000 of USDC that's sitting inside of Tornado Cash. Anyone who's deposited this USDC into Tornado Cash with the hopes of withdrawing it later to a clean address has now had their USDC frozen. So why did Circle do this? Why did they freeze the USDC inside of Tornado?

• 17:26David Hoffman?

  Because they have to. They are a regulated US entity and violating OFAC is a BFD. Circle is huge supporters of DeFi and this entire industry, and they are a big advocate for crypto on Capitol Hill. But you gotta pick your battles and going up against OFAC over $75,000 is not the right battle to pick. This is ultimately how the technology sector becomes an extension of the state. USDC could either comply with the government or shut down its business. It's a pretty obvious trade. This OFAC effect has also spread to Infira and Alchemy, two node service providers that help you process your transactions from Metamask or most other wallets. They've stopped relaying transactions to Tornado Cash because again, they have to now.

• 18:06David Hoffman?

  Some people say that centralized endpoint providers like Infira or Alchemy make DeFi not decentralized, but this simply highlights the importance of running your own node. If you want to use Tornado Cash, you'll need to run your own node now, or you'll have to find an RPC provider who's outside the United States. But if you are a US citizen and you're inside the United States, it doesn't matter because you can't touch Tornado Cash either way, because it's illegal to do that now. And this is all par for the course. These are all relatively expected outcomes from this OFAC decision, but here's one that's a little bit more unexpected. Bantag recently tweeted out that the GitHub accounts of people who contributed to Tornado Cash repositories are getting their GitHub accounts deleted. People, developers that published open source code are getting deplatformed from GitHub.

• 18:48David Hoffman?

  Roman Semenov, one of the lead devs of Tornado Cash tweeted, "My GitHub account is just suspended. Is writing open source code illegal now?" Let's jump into my conversations with Collins and Jerry about the same subject, because this is not the first time that open source developers and cryptographers have gone toe to toe with the US government. Can you place this into just the historical precedent of like legal arguments about open source software versus top-down government regulation trying to silence open source software? Like, how does this fit? How is this the same fight that we've always been fighting? And how is this specific instance different than previous fights?

• 19:25Speaker 01

  Yeah, it's similar but not the same. What you're referring to are the early crypto wars, where cryptography had always been considered a munition, meaning basically a national security defense

• 19:39Speaker 01

  type of thing that could not be exported, right? So the problem with that is that cryptography is ultimately just speech. The way that I think a lot of early pioneers in internet space, and especially the folks who were writing PGP. I highlighted this was yes, by putting it on a T-shirt, although I think that was more DCSS, which is the encryption breaking for DVDs. But what they did was that they printed it out as a book, and then they mailed it overseas. And they said, OK, so are you going to put me in jail for publishing books? And I think that is what put it into relief, such that the government dropped the case. Here, it's a little different,

• 20:23Speaker 01

  because it's not that there is a prior restraint on speech, where OFAC is saying you can't publish this kind of stuff. But they're clearly saying that if you publish this kind of stuff, we are going to ban it in such a way that nobody's going to be able to republish it, and nobody is going to be able to use it. So that's going to create a chilling effect on speech. And Supreme Court has found, even if you have a government action, it creates a chilling effect that essentially prevents people from speaking. That could be considered a violation of the First Amendment.

• 20:58David Hoffman?

  OK, let's zoom back out and unpack some of the differences about having a centralized entity or person on the OFAC SDN list versus something like Tornado Cash. Eric Voorhees said it well. The headline reads that Treasury sanctions Tornado Cash. In reality, Tornado Cash is not a person nor a business entity. It's an open source software tool. It cannot be sanctioned. It does not respond to subpoena or legal requests. It is privacy-seeking Americans who have been sanctioned. A frequent take from Bitcoiners that I love is that there's no such thing as actually banning Bitcoin. There's only countries banning their citizens from accessing Bitcoin. Tornado Cash wasn't banned today. Seeking privacy was. But the idiosyncrasies continue. Kobe, facetious as always, tweets out, "What happens if I put one ETH into Tornado Cash,

• 21:42David Hoffman?

  and I withdraw it to Gainesy's address? Does he go to jail? Sounds like a pretty good deal for me. Low cost and no more Gainesy." Gainesy is a famous crypto trader. I'm not sure if Kobe and Gainesy actually have beef. Kobe might just be playing around. But the point stands. US Americans are not allowed to interact with a tornado cash contract, and that includes receiving money from it. Right before this interview, I discovered that someone was putting in many, many, many deposits of .1 ETH into tornado cash, then withdrawing them to some big-name addresses. Jimmy Fallon got a deposit, making him in violation of OFAC. Shaquille O'Neal got one, boom, violation. Brian Armstrong from Coinbase got one, boom, violation. Dave Chappelle, violation. But then I noticed that banklist.eth also got sent .1 ETH from tornado cash,

• 22:26David Hoffman?

  and so did I, and so did Ryan. Making us all criminals, I guess? There's no real way to stop this. Well, this is kind of funny, and it does make a farce of the OFAC decision. It highlights what's really going on here. There's an unstoppable piece of software that's running on the internet, and it is adjacent to so many of us who use DeFi for our financial activity. Parts of this story are just simple controversy. DeFi people want privacy, and OFAC wants to stop money laundering. These two parties are going to collide in their interests. But the other part of this story is that we need better clarity and rules around stuff like this to even make them enforceable. Jerry from Coin Center says, "I'm supposed to report this to OFAC, that I've received this illicit money in violation of the OFAC rule." Well, I'm just not going to do that.

• 23:10David Hoffman?

  Hopefully, I don't go over to jail over that, but if I do, I hope they let me take my studio with me. Another important part of the story is the phrase that both Jerry and Collins use in their interviews: "chilling effect." The way that Jerry and Collins use this phrase made me think it's more than just a descriptive phrase. "In context of regulation, chilling effect is the concept of deterring free speech and association rights protected by the First Amendment as a result of government laws or actions that appear to a target expression." Let's listen in.

• 23:38Speaker 02

  Suddenly, we're in a world where open-source tools may be subject to being placed on a sanctions list. And we already started to see knock-on effects from this. You know, we've got GitHub not just stopping the repos or removing the accounts of the main devs, but also people who've just randomly contributed to this type of project. That type of chilling effect is, I think, going to be significant, not just for crypto, but for open-source software.

• 24:00David Hoffman?

  Matthew Green, who we've recently had on the show, said, "Using sanction power to take code off public source code distribution sites feels like a pretty blatant attack on the First Amendment." He's talking, of course, about the deplatforming of the Tornado Cash developers from GitHub. He continues, "It's also a pretty stupid attack. It's literally a decentralized version control system. Thirty years of hard legal work to establish First Amendment protections around software distribution blown up in a day by GitHub and Microsoft. What we should all be worried about is how scared this may make our open source software devs. We need these developers to feel empowered and comfortable in writing open source financial tools. Open source financial tools are the reason why we are all here. If this chilling effect goes too far, it can slow down innovation and progress at

• 24:44David Hoffman?

  this industry in a moment when this industry and the world needs it the most." Standing up for Tornado Cash isn't about protecting this random DeFi app that you may or may not have used. Tornado Cash is a fantastic example of a good product that people use. Tornado Cash enables privacy for everyone that uses it. But this goes to the heart of the issue. Do we as a country prioritize global political desires of the United States nation over the wants and desires of its citizens and individuals? I don't think we do. This country has always stood upon individual freedom and autonomy, and this new sanction from OFAC is putting the state over the people, which is inherently anti-American.

• 25:23Speaker 01

  Well, what about the privacy of people who want to use crypto and want to do so protecting their privacy? I don't know what they would say to that. I think something they might say to that is, "Look, you can use Venmo. You don't have to use crypto." But of course, that is incredibly anti-innovation, really un-American, I would say, an un-American perspective.

• 25:45David Hoffman?

  Some last few takeaways to discuss. Eric Connor tweets, "I think today is a good reminder that we must always prioritize decentralization. Deployed contracts can never be stopped because Ethereum is sufficiently decentralized, but things like centralized stablecoins and traditional domains can be. We need full-stack decentralization." So decentralization isn't just this meme that people won't show up about. It's a constant check on power that needs to be present, even when no one is attacking it in that moment. Ninety-nine days out of 100, you won't need decentralization. But you do need decentralization 100 days out of 100 days, because that's what keeps the doors closed towards people who wish to shut these systems down. So, Bankless Nation, we've reached the part of the frontier where they fight us.

• 26:28David Hoffman?

  This is nation-state authority versus individual autonomy. We've often said this on the show, that crypto isn't about left versus right. It's about top versus bottom, the state versus the individual. The nation staters will argue that we need this rule to protect the public good. North Korea can use tornado cash to finance productions of nuclear missiles, which is an unfortunate thing to have to argue against. But I'll ask you, is it really going to be tornado cash that is the thing that enables North Korea to access nuclear weapons? Is there nothing in the meat-space world that can be more effective force against North Korea? And yes, people also use tornado cash for laundering money and evading taxes too. It's obvious why the nation-state doesn't like this technology. But we'll go back to the basic principles that both crypto and the United States of America stand on.

• 27:12David Hoffman?

  Individual freedom and autonomy should be preserved to the maximal degree. And when it comes to a conflict between the state and the individual, the individual should get the priority.

• 27:21Speaker 02

  Like, that's the quintessential use of speech. Like, if there's gonna be a concept of like, code is speech in America, that's it, right there. Like, "Hey, people, I've got a good idea. This thing is really cool. You guys should try it out." That's it. Like, there's no business interest in it. So, I don't really know when people are like, "Ah, there's gonna be, you know, better, maybe we take the fight in a better time." Yeah, we'll have to pick and choose our battles, but being frank, I think, you know, that's where I think you want to use as much firepower as possible.

• 27:48David Hoffman?

  If we can't have access to basic privacy tools, it is the first step on a long dystopian road of not having access to anything. I'm aware of this slippery slope fallacy behind that statement, but when individual freedoms are given up towards nation-state control, it's really, really, really hard to get it back. I want to thank Collins and Jerry for helping me tell this story. And I also want to thank Luke, my editor and second brain at Bankless, for testing this show format in production with me. And I also want to thank you, Bankless Nation, for being on the journey with us. As always, ETH is risky, crypto is risky, DeFi is risky, tornado cash is now legal. You can lose what you put in because Circle might freeze it, but we are headed west. We're on the frontier.

• 28:30David Hoffman?

  It's not for everyone, but we are glad you are with us on the Bankless journey. Thanks a lot.