Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
Crypto is often an industry of grifters hiding behind principles. Unlike other financial sectors, where the sole priority is maximizing returns, blockchain technology was built on ideals of decentralization and economic liberty, with the promise of some utopian future exploited to mask uncomfortable truths.
The Department of Justice filing charges last week against the two founders of Tornado Cash, a cryptocurrency mixer used to obscure the public nature of blockchain transactions, seems like the perfect example. The service, at least nominally, is open-source and decentralized, meaning it is not controlled by any individuals. It is a piece of software that anyone can interact with. When the Treasury Department moved to sanction the mixer last year owing to its favored status among money launderers, the action represented an unprecedented—and legitimately concerning—development of targeting software, not people or a company.
Many in the crypto industry jumped to the same conclusion after last week's charges against two of Tornado Cash's founders. In an Bitcoin. She said the Tornado Cash indictment doesn't seem groundbreaking—in fact, she argued you could draw a clear line between her work on that original case in 2007 to last week's, where prosecutors are not focused on regulatory questions, but whether the defendants conspired in agreement with others to launder funds.
"This is low-hanging fruit for the government," she told me. "These are pretty egregious facts."
One of the charges, conspiracy to operate an unlicensed money-transmitting business, does raise the question of whether Tornado Cash was, in fact, a money-transmitting business—an allegation that CoinCenter took issue with, based on 2019 guidance from the Financial Crimes Enforcement Network, which seems to exempt anonymizing software providers. Rimon pushed back, saying that money transmitting boils down to whether you're involved in the flow of funds, and whether the transactions would happen without the entity in question.
If the facts laid out by the prosecutors prove to be true, the Tornado Cash founders created a software program that facilitated money moving from one place to another—and were seemingly in charge of the product. Even if the DOJ is punting on the idea of whether a project can truly be decentralized, she cautioned that it may not matter. "The government," she told me, "is not on board with the idea that human beings can create a platform that goes out, facilitates illegal conduct, and nobody is responsible for compliance."
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
