September 28, 2022

How Tornado Cash Sanctions Impact Bitcoin – Bitcoin Magazine

This is a transcribed excerpt from the “Bitcoin Magazine Podcast”, hosted by P and Q. In this episode, they are joined by Dylan LeClair and Sam Rule to talk about the recent Tornado Cash sanctions by the US Treasury.

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Dylan LeClair: Tornado cash is an open-source wallet mixing Ethereum, like Samourai Wallet or Wasabi (which has already started becoming OFAC compliant and blacklisting certain addresses). These are ultimately just collaborative bitcoin transactions. People call it a coin-mixing solution or whatever they try to call it to try to criminalize it. It’s just a bitcoin transaction; it’s just a collaborative expense. It’s just information. You could argue that it’s against free speech in a way, but the state isn’t really going to accept it.

It’s just not a good precedent. The founder, who is just a software builder, is potentially canceled because he created something the US government didn’t like and blamed Korea.

It was pretty ridiculous, but just a pretty big day, in general, and not great for the privacy movement, in general, but we knew it was happening. We knew it was only a matter of time.

Q: I want to play devil’s advocate. I’m not asking this question because I think any action is warranted, I’m just a vehicle to share a different idea. Let’s ignore the Tornado Cash, but let’s say it actually happened to Do Kwon or Mashinsky. Would your feelings be different?

LeClair: Let’s single out a fraud, Alex Masinsky, and think what you will about whether Do Kwon was seriously building something or knew it was all a Ponzi all along. I’m not going to make that call here. But as far as what Alex Masinsky and Celsius did, it was fraudulent, so it’s different from someone making software. It is non-custodial, as Tornado Cash is a non-custodial Ethereum mixer. You send a transaction – I don’t even know the exact techniques as well as I do with bitcoin and mixing – but you send eth and it’s a smart contract that executes it and mixing and you can’t tell what is the input and what is the output is the basis of it. Sorry if I clustered the answer a bit. The founder or creator of this software, Roman Semenov, doesn’t really touch eth. There’s this little war between eth and bitcoin, where all the hype around the merger and potentially the Twitter .eth cult will go against the Bitcoin Maximalist Twitter cult. It’s all pretty stupid and I think it misses the most important point that a crackdown is coming.

Whether Ethereum has its merits or rides on Bitcoin’s back is anyone’s guess. I probably align myself more with the Bitcoin Maximalist point of view. Screaming that everything is a scam over the past decade hasn’t really served anyone well or protected anyone. People always opt for scams and maybe we Bitcoiners should refine our message a bit. Although I’m pretty bearish on all other altcoins against bitcoin over the next year, five years, 10 years.

I think Ethereum is hugely overvalued at 50% of Bitcoin’s market capitalization, but I think asking for more regulation in labeling Ethereum as security is probably the wrong way to go. To keep bringing him back here.

Sam Rule: Going back to your question, is it justified if it was fraudulent activity or Mashinsky or something that they shut down. I guess it doesn’t really matter. If you do it for one, you’re constantly going to find the gray area to do it more and more. It just goes back to the point that these are just two completely different systems and always will be because stablecoins will be bigger centralized transmitters regardless of the chain whether it’s Tron or Ethereum on which they happen to be, they’re going to run into these problems. They still work. Stablecoins are by definition a blockchain, dollar version of the financial system we have today.

I don’t think it really matters in terms of punishment, whether it’s illegal activity or not. Now, when you think in terms of bitcoin and innovation, what that means is you’re going to have so many conversations. If bitcoin has been successful over the years and has had so many problems trying to close the rails for all sorts of system reasons that the US has had or the western world has really had very strong financial control over that. They’re going to lose that power, basically. They won’t want to give it up in such a way.

Again this is just as an example, probably very small, if I think it was North Korean money laundering it will happen and probably many will fight and say, it’s very justifiable to close that. It just goes back to the censorship resistance capabilities of all of this and what is really censorship resistance and when bitcoin grows and evolves in these situations is it going to prove that it’s really really censorship resistant ? For me, that’s probably the biggest risk: how much influence do governments and corporations have between blacklisting addresses and trying to shut down some sort of circular economy, how much are they going to be able to do? How well will the tools on Bitcoin be able to withstand this?

LeClair: I think on that note, it’s pretty interesting. All the macro craziness we’ve seen over the last year, I’m not just talking financially, but the geopolitical tension that’s building more and more with the US and China and all the Treasury Reserve sanctions . We are a long way from bitcoin being anything but a loss-making asset, a 24/7/365 inverse VIX. S&P goes down or up, bitcoin is in beta and it’s just that reflection of tied liquidity and all that extra speculation hanging around.

If we reach that bitcoin point at $500,000 and it equals gold, even bigger than that, bitcoin becomes liquid enough. It becomes the enemy of money, but not at the level of drug dealers and petty speculators, as it was in 2011 and it is now in 2022, but no matter how long it takes, it will be enough liquid for opposing nations to hold in their reserves as treasury [asset].

Bitcoin mining and the reality of digital money game theory and “not your keys, not your coins” at the nation-state level. It’s like it’s not your system. And ultimately, I think the long-term bitcoin theory of the game is that people, institutions, and eventually rulers are going to go for something where they have the rules in their favor. Whether it’s absolute rarity, increased production costs, and you decide there’s no more than 21 million parts running your own software. The bet on bitcoin is the bet that people converge on it because there is no other alternative. You cannot use USDC and you cannot use UST (US Treasuries) if you are in Russia or China.

What if China invades Taiwan, and I’m not going to pretend to be a LARP here, like I’m a geopolitical expert and I know what Xi Jinping is going to do with Taiwan. I don’t know, but I know that the trend of growing hostility between the largest institutions and sovereigns on the planet will increase and confidence in this international monetary order that has been built for 80 years since Bretton Woods… and after 1971 this order became floating fiat currencies. It is this experience; we’re really only 51 years old. What happens when all of this culminates in a massive competitive underworld and unraveling of this international monetary order, which we have no doubt started to see over the past couple of years at an increasing rate and probably in the next three to five years? Bitcoin is probably there.

I am quite bearish in the short term. I think equities have a head start and we still haven’t seen the biggest volatility event in this financial meltdown, but when it comes to censorship resistance, I think one of the biggest big bullish case is to think about this geopolitical game theory, looking at why gold itself has failed as a global currency and global currency among sovereigns at the highest level. Why did that fail and why did that trust, that connection, that relationship fail, and then look at Bitcoin or look at Ethereum, look at USDC and rate every asset on the planet in terms of what’s going to meet that kind of need: that global need for a neutral reserve asset.

My bet, my conclusion is Bitcoin, but that’s me personally. I guess everyone has to make that decision for themselves, but that’s my thesis here.