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Coinbase is fighting back as the SEC closes in on Tornado Cash

Coinbase is fighting back as the SEC closes in on Tornado Cash

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On September 8, Coinbase announced that it was filing a lawsuit against the US Treasury Department. The cryptocurrency exchange is funding a lawsuit filed by six individuals challenging the sanctions imposed on Tornado Cash. On September 9, Securities and Exchange Commission (SEC) Chairman Gary Gensler announced that he will work hard with Congress to increase cryptocurrency regulations.

But the two stories are not mutually exclusive. The series of events shows that governments are purely reactive rather than proactive when it comes to decentralized finance (DeFi).

The Office of Foreign Assets Control (OFAC) approved Tornado Cash in August. OFAC claimed that the smart contract mixer has helped launder more than $7 billion worth of cryptocurrency since its creation in 2019, including more than $455 million stolen by North Korea-linked hacker Lazarus Group.

Coinbase CEO Brian Armstrong said in a statement that the Treasury Department went too far and took the “unprecedented step of sanctioning an entire technology rather than specific individuals.” In addition to claiming that the sanctions exceeded the department’s authority, Coinbase argued that the actions:

  • Remove privacy and security of encryption users;
  • harm innocent people; and
  • Stifles innovation.

The next day, Gensler doubled down on his push for tighter regulation of the DeFi market, arguing that crypto businesses would not thrive without it. “Nothing in the crypto market is incompatible with securities laws. Investor protection is equally important regardless of the underlying technologies.”

Related: The US Treasury Department clarifies that releasing Tornado Cash’s code does not violate sanctions

Not only does his choice of words, such as “regardless of the underlying technologies,” reveal his lack of understanding of crypto and blockchain technology, his speech sparked an outcry from the Web3 community, with many arguing that government regulation is a wolf in sheep’s clothing.

Jake Chervinksy, a lawyer and head of policy at the Blockchain Association, tweeted in response: “Crypto is a new and unique technology: how it should be regulated is up to Congress (not the SEC chairman).”

Safety legislation is worrying enough. But the Tornado Cash sanctions set an alarming benchmark for anyone involved in digital assets. Not only is blockchain technology and cryptography constantly changing—what’s secure now may not be secure in the near future, and it almost certainly won’t be secure next year—but there are countless legitimate applications for legitimate applications like blockchain technology.

DeFi is all about privacy. The clue is in the name – decentralized Finance. Mixers like Tornado Cash further protect their users’ privacy by mixing users’ deposits and withdrawals into liquidity pools, hiding their addresses and securing their identities. Users want to protect the privacy of their transactions for several legitimate reasons.

In this case, one of the plaintiffs used the mixer to donate funds to Ukraine anonymously. Another was an early adopter of crypto and now has a significant following on social media, with his public name ENS linked to his Twitter account. He used a smart contract to ensure his safety while trading. Now their assets are trapped in Tornado Cash.

A person’s finances contain some of their most sensitive personal information. And law abiding citizens have the right to keep this private. But it is precisely this privacy that is being eroded by recent proposed regulation by Gensler, the SEC and other governments around the world.

Related: Coinbase-Backed Crypto Investors Sue US Treasury Department After Tornado Cash Sanctions

As with these sanctions, stopping people from using the services for legal and even benevolent acts, not to mention locking out developers from writing open source code that wasn’t illegal at the time of creation, feels like an Orwellian dystopia. .

Treasury officials have since backtracked, clarifying in guidance that in fact “interacting with the open source code itself in a way that does not involve a prohibited transaction with Tornado Cash is not prohibited.” The guidance adds that copying the protocol code, publishing the code and visiting the website are all allowed.

Although the stories are not officially connected, the timing and similarities between the two stories are telling. Gensler likened regulation to traffic control, saying, “Detroit wouldn’t have taken off without traffic lights and cops.” Armstrong used the analogy of highways and robbery, saying, “Sanctioning open source software is like permanently closing a highway because robbers used it to escape the scene of a crime.” And he’s not wrong.

How many talented developers would now give up writing game-changing code that would not only innovate industries, but help people all over the world? A small number of bad actors should not prevent the development of a technology that has such a huge potential to revolutionize industries even beyond finance.

The Coinbase lawsuit is a pivotal case in cryptocurrency history, and the outcome – whatever it is – will have huge ramifications for DeFi. And of course its users.

Zac Colbert is a digital marketer by day and a freelance writer by night. He has been dealing with digital culture since 2007.

This article is for general informational purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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