Tornado Cash sanctions will ultimately undermine the US and strengthen crypto

The United States government’s sanctioning of the open-source code that makes up the Tornado Cash privacy protocol may be shocking, but it’s not surprising. America has been tightening its grip over the global financial system for decades ostensibly to cut down on bad behavior but also to project power abroad.

Economic sanctions, like the ones enforced by the aptly named Office of Foreign Assets Control, are a powerful weapon. The agency’s website states that it “enforces economic and trade sanctions based on U.S. foreign policy and national security goals.” It does this to fight drug dealers, terrorists, and “other threats to the national security, foreign policy or economy of the United States.”

Scary stuff, particularly when enforced by the issuer of the global reserve currency. But therein lies the rub because the more the U.S. weaponizes access to the dollar, the greater the incentive for every other country to find an alternative. One likely winner from this dynamic is Bitcoin (BTC). To see why, we need to study the architecture of money.

Fiat currencies like the U.S. dollar have no inherent transfer mechanism. Large payments can only be made through the banking system, and banks need government charters to operate. This symbiotic relationship enables governments to not only control the issuance of their money, but also access to it. For the issuer of a reserve currency, monetary censorship becomes a powerful weapon, arguably as destructive as bombs and bullets.

Related: Tornado Cash shows that DeFi can’t escape regulation

Bitcoin is different because it has its own censorship-resistant payment system. Anyone can make payments to anyone else — with or without the involvement of a licensed intermediary. Governments can still wield power over individual exchanges, custodians, or miners, but they can’t stop the protocol or the community that runs it.

Bitcoin is also apolitical in ways that fiat currencies can never be. Along with ever stricter sanctions regimes, the U.S. has recently taken the drastic step of freezing the foreign exchange reserves of Russia and Afghanistan. Regardless of one’s opinion of the legitimacy of such acts, they drive home the point that dollar reserves are only useful so long as their owners stay on America’s good side.

A critic could argue that the sanctioning of Tornado Cash proves cryptocurrencies are not immune from politics. Indeed, the U.S. has been sanctioning Ethereum and Bitcoin addresses for years. What makes crypto unique is the fact that the decentralized protocols in question don’t care, at least not in a way a bank might.

After all, the permissionless nature of these networks means that anyone can do anything, including continuing to process transactions for sanctioned addresses. That doesn’t mean that a European miner or South American exchange wants to upset Washington, but it does mean that they could if they had to. This optionality may come in handy in a crisis.

Tornado Cash dev arrested

Do Kwon still free and doing media interviews

The world is a silly place

— sassal.eth (@sassal0x) August 15, 2022

None of this means that global adoption of Bitcoin is imminent. The infrastructure remains raw, and most governments remain cautious, in part because censorship resistance also challenges their monetary grip at home. But the more globalization reverses, and the more America tries to enforce her will on other countries, the greater the need for a backup plan.

This relatively new threat to the dollar is one explanation for why America refuses to pass sensible crypto regulations, despite a thriving domestic industry. The more the U.S. normalizes Bitcoin as a store of value internally, the higher the odds that it gets adopted as a reserve asset abroad. If it’s good for Blackrock, then why not a central bank?

Countries don’t need to put their entire reserves in…