The ban of Tornado Cash in the U.S. could have ripple effects across Web3 protocols, particularly ones that offer privacy on the blockchain.
There are mounting concerns that recent United States government sanctions against Tornado Cash will become a “slippery slope” for Web3 privacy that could eventually make the entire space “meaningless.”
Speaking to Cointelegraph, Shumo Chu, co-founder of privacy protocol Manta Network expressed worry that the strict sanctions against Tornado Cash could have a knock-on effect on every Web3 protocol including ones providing privacy.
Chu is one of the co-founders of Polkadot-based Manta Network, a layer-1 privacy protocol that enables private transactions in decentralized finance (DeFi).
Tornado Cash (TORN) is an Ethereum (ETH) privacy protocol that anonymizes coin transactions. These protocols are similar to Monero (XMR) and Zcash (ZEC) which masks sender and receiver data of crypto transactions.
Earlier this month, the U.S. Treasury Department effectively barred US residents from using the protocol and placed 44 ETH and USD Coin (USDC) addresses associated with it on the list of Specially Designated Nationals on Aug. 5.
Chu expressed worry that other privacy protocols like his could wind up in the same crosshairs, which would add more censorship to the point it would “essentially make the entire Web3 space meaningless.”
Chu acknowledged that the U.S. government ban was done ostensibly in the interest of national security as the North Korean hacker group Lazarus has been known to use Tornado to launder the funds it steals.
But in banning the protocol, Chu questioned regulators’ understanding of how decentralized systems based on open-source code can be located and operated anywhere.
“It’s quite possible regulators just don’t understand distributed blockchain technology and how open source code can be anywhere. [They] may have actually thought Tornado Cash developers deliberately helped North Korean hackers.”
Last week, Dutch police arrested a Tornado Cash developer they suspect is involved in money laundering.
Chu added that there have been instances in the past where cryptography developers have been arrested, such as Ethereum developer Virgil Griffiths, but that banning a protocol is “a new paradigm” signaling the government is attempting to put a reign on code and mathematics itself.
“They are banning the protocol instead of some people. Essentially this is a piece of code from the Ethereum blockchain.”
However, Chu believes that privacy protocol developers ultimately have the upper hand. He said that since privacy developers are distributed around many jurisdictions outside of the U.S. government’s reach, noting:
“If the US tries to implement draconian measures over privacy devs, it won’t go very well for them.”
As a privacy protocol developer himself, Chu notes there is a narrative being set that privacy is only for bad actors, arguing that “normal people use it too.”
Related: Tornado Cash shows that DeFi can’t escape regulation
He added that there should be a push to promote good use cases as well because, as he said, “the nature of the system is permissionless, so there will be people gaming the system.”
His views echo those of Kraken CEO Jesse Powell who told Bloomberg TV on Aug. 16 that the sanctions against Tornado were “unconstitutional” and that “people have a right to financial privacy.”
In Chu’s eyes, the barriers to entry into privacy protocols should be low so that normal people can use them every day. However, his ideal could be threatened by further sanctions of privacy protocols.
