Coinbase and the new legal battle in the crypto market

US strengthens money laundering control

Recently, the US Treasury Department’s Office of Foreign Assets Control issued sanctions against a technology called Tornado Cash. The reason is: “it has been used to launder over $7 billion worth of virtual currency since its creation in 2019.”

The point of interest is that Tornado Cash is an open source software, as a tool that automatically mixes digital assets and redistributes them to protect privacy. As a result, a large amount of digital assets associated with illegal activity have migrated through this protocol since it was launched. Any American who uses the service now faces up to 20 years in prison.

Some believe such sanctions are necessary to prevent money laundering, while others see it as a sign of excessive government intervention. The question is why is there a need for a protocol like Tornado Cash in the first place? Is it because the financial system is not balancing privacy and security?

More than a billion people worldwide, including millions in the US, lack access to basic financial services, said Tomicah Tillemann, director of policy at crypto fund Haun Ventures. Many are unable to pay bills, send money to their families because they don’t have a bank account, or identification, and others simply don’t trust financial institutions.

These suspicions are often justifiable. Conducting transactions of any size requires sharing sensitive information such as date of birth, address, social security number. Regardless of whether you are renting an apartment or a car, that information is frequently misused and compromised.

“To date, the information system has worked better to prevent crime. We can redesign our financial infrastructure to provide more privacy and security, without making it easier for fraudsters, by exploiting Web3 technologies that open up key new methods for security and identity verification. Tornado Cash is just computer code. Trying to disable these protocols will most likely trigger a never-ending game. Instead, we need a new approach to building a digital financial infrastructure that protects the privacy of individuals without undermining security,” the director said.

New legal battle

Regarding the US Treasury Department’s sanctions against Tornado Cash, Coinbase Global Inc, the largest US cryptocurrency exchange helped organize a lawsuit against these sanctions.

Coinbase believes that the Treasury Department’s actions threaten the future of decentralized finance (DeFi) and Web3 in particular. Photo: Getty images

The move by the US Treasury Department is unprecedented and could stymie the crypto industry, which is built largely on smart contracts, said Paul Grewal, Coinbase’s chief legal officer. After the sanctions were announced, Coinbase spoke to the agency about reversing its decision to no avail. Several Coinbase employees were affected by the Tornado sanctions for using the tool to send a donation to Ukraine and have now locked some of the funds in it.

In his previous tweets and retweets, Coinbase CEO Brian Armstrong expressed his opposition to the sanctions and hinted at legal action. “We have no problem with the Treasury sanctioning the bad guys, and we take a tough stance against illegal behavior,” Armstrong said in a blog post. But in this case, the Treasury went much further and took the unprecedented step of sanctioning the entire technology instead of individual individuals.”

The technology has legitimate applications, he adds, many innocent users have trapped their money and lost access to an important security tool. Coinbase believes that the Treasury Department’s actions threaten the future of decentralized finance (DeFi) and Web3 in particular. While Web3 is a version of today’s Internet built primarily on cryptocurrency technology, where ownership and control are more widely distributed.

Currently, developers are moving towards a middle ground that protects privacy and upholds fundamental democratic principles, said crypto policy director Haun Ventures. But the design of these systems is critical, requiring both government and private intervention with a number of key issues such as:

First , we need to have clear goals. At a minimum, these should include giving people more control over their information, ensuring greater accountability for how that information is used, and expanding access to services. financial services in general.

Second , there is a need for technical standards that make it easier and less expensive to establish and secure digital identities. Banks in the US or Canada currently spend more than US$30 billion a year on identity verification but often fail to prevent money laundering.

Similar Web3 tools that enable secure, inexpensive transactions between digital wallets can make proving ourselves to be less expensive. Open standards for digital ID authentication can ensure fair competition, reduce costs for consumers, and encourage a race in data processing.

Third , we need financial regulations that can micro-target bad actors while still allowing safe transfers to dissidents and others in closed societies.