The U.S. sanctions of Tornado Cash are unconstitutional

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The U.S. sanctions of Tornado Cash are unconstitutional

Law Precedent said the code is protected by the First Amendment.

The U.S. Department of the Treasury's sanction of Tornado Cash on August 8 was a remarkable development. It was not just the scope of the action, he said. It was the fact that a piece of code was blacklisted, not a company or a person.

This is just the latest event demonstrating the long-standing reach of regulators, even in the decentralized precincts of the internet.

We at Swarm, a decentralized exchange based in Berlin, agree with other crypto leaders that sanctioning Tornado Cash is unconstitutional and a startling act of overreach from regulators.

In a 1996 case, the federal court established'source code' as speech, which means it's protected by the First Amendment of the U.S. Constitution. It's the leading case that applies this widespread standard to encryption issues.

The Supreme Court of Appeals ruled Friday that government regulations preventing the release of code were illegal. It would argue that the Office of Foreign Assets Control didn't ignore this precedent by clamping down on Tornado's code.

There are several layers to unpack here.

The government said Tornado laundered $7B worth of cryptocurrencies since its inception. Tornado is now on OFAC's sanctions list. Elliptic found that approximately $1.5B of those tokens were laundering proceeds from criminal activity.

In cybersecurity, mixing services is a legitimate part of the process. We use privacy tools to hide the balances in our current accounts. Privacy is a fundamental right in almost every nation, and enshrined in a constitution, statute, or rule. Although bad actors can use code illegally, the code itself isn't inherently unjustifiable. Tornado Cash is a mix-off that is decentralized, operating through smart contracts. In addition, it's challenging to know who uses the software in the first place.

Github deleted the so-called mixers code from its website, which it had previously hosted, in less than 24 hours. The move can be seen as more symbolic than anything, as the code is still available on the Ethereum blockchain and can be copied to create an identical service.

The U.S. Treasury said Tornado Cash violated a range of financial regulations, including links to nefarious hacker groups in North Korea. While the U.S. Treasury Department banned the service, Dutch authorities traced one of the developers.

The arrest of Alexey Pertsev, who is alleged to be involved in Tornado Cash, raises even more thornier questions for DeFi platforms. The fact that Pertsev, who has not been charged with a crime, may be held criminally liable for writing code is striking. Under freedom of speech - or code - pertsev's arrest would not hold up in a European court of law.

Tornado sanctions are not apermissionless decentralized protocols and do not have the appropriate architecture to respond to them. Inadvertently, these protocols are being forced to disable and block law abiding users from their services.

To determine if a wallet should be blocked or not, third party APIs are too simple. It only returns a true or false result on whether a wallet has interacted with a Tornado Cash address. Users who were actually victims of hacks, whose coins were sent to Tornado Cash to hide the illegally-gained funds, are being grouped with bad actors and blocked by DeFi platforms. Bans are being implemented by the user interface because the backend infrastructure has not been properly built.

protocols fail to identify users, relying on limited information on wallet addresses to consider them blacklisted or 'tainted', and their smart contracts are not designed to block users. Despite the distance between them and Tornado Cash, any interpretation of a wallet or user can have serious repercussions in the future.

Adding identification layers to permissionless infrastructure provides positive screening as much as it keeps harmful players out. It provides clarification about who is participating in transactions, revealing their right to do so to relevant authorities and market participants. It should not lead to a blanket ban on privacy tools and permissionless structures, he said. However, authorities should not have a carte blanche on access to user information.

DeFi infrastructure must be built along regulatory lines. As long as people need to convert back to fiat currency, sanctions like these are an effective way for lawmakers to control the development and spread of DeFi. Some crypto ventures, such as Swarm, have been built by being fully compliant from day one, applying know-your-customer and anti-money laundering checks to all counterparties wishing to use their contracts.

regulatory enforcement - on a global scale - is becoming a reality for the DeFi space. There is a clear global, coordonnée approach in place. A secure and secure platform is crucial for providing users and investors with trust and security through robust, transparent architecture.

At a critical time in its evolution, Regulatory approval will serve to give confidence back to the DeFi sector. institutional players continue to adopt, invest and include DeFi in their future plans, but the transition toward that unified future will only occur once the sector interacts with regulation in a positive way.

The co-founder of Swarm is Philipp Pieper.