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While policymakers have been busy formulating sweeping changes and regulators have been busy debating jurisdiction, some participants in the cryptocurrency industry have been busy regulating the space themselves. And considering that all too often the word “regulation” follows the word “government,” we shouldn’t be too quick to overlook the fact that the market too is capable of creating a level of order and regularity. In the case of cryptocurrency, part of this effort to create order and regularity has taken the form of countless individuals and organizations seeking to combat fraud and scams.
Ivane Nachkebia and I noted this reality of regulation in our recent comment letter to the U.S. Department of the Treasury. However, when the Treasury issued new sanctions restricting all U.S. citizens from accessing the Tornado Cash protocol, it quickly became apparent that this idea needs to reach a wider audience. Given the nature of blockchain technology and available private resources, the blanket ban on using open‐source code, in addition to having potential legal ramifications, was not only an objectionable application of the law, but also an unnecessary one.
As we explained in our comment letter, decentralized cryptocurrencies are unique in that they can be freely analyzed by anyone at any time. The code behind their design, the transactions taking place, and the history of their use are all openly available. And while that is not to say that auditing the code or blockchain is a simple task, cryptocurrencies are also not unique in this respect. As Federal Reserve Bank of St. Louis Senior Vice President David Andolfatto and Assistant Vice President Fernando Martin noted in a recent paper,
Understanding how cryptocurrencies work “under the hood” is a challenge for most people because the protocols are written in computer code and the data are managed in an esoteric mathematical structure. To be fair, it’s difficult to understand any technical language (e.g., legalese, legislation, and regulation).
And like with legalese, legislation, and regulation, countless educational resources have emerged in recent years to help the public better understand the cryptocurrency space. The Wharton School of the University of Pennsylvania, Massachusetts Institute of Technology (MIT), and other universities have already introduced courses and certification programs to their roster. More so, several groups have also introduced more entry‐level courses.
Fortunately, with or without formal training, users of cryptocurrencies do not have to carve their paths forward alone. There are many examples of individuals and businesses seeking to regulate the cryptocurrency space through private rules. Companies, organizations, and individuals have all worked to publicly identify and remove bad actors from the space. A few examples include:
And while such freely available services have benefited the space, so too have paid services from specialized audit firms like Chainalysis, Ciphertrace, Peckshield, Elliptic, Haechi Labs, and others. These firms have partnered with several law enforcement agencies from around the world to help find and stop individual criminals by using blockchain analytics. Unlike the Treasury’s decision to target the entire Tornado Cash software protocol, agencies partnered with these firms have time and time again managed to go after the individual criminals.
So while Congress and other government officials should take away from the Treasury’s sanction on Tornado Cash that it is indeed important to recognize the difference between decentralized and centralized projects, government officials should also recognize when it is appropriate to use a scalpel versus a sledgehammer. With so many tools on the table that can be used to go after individual criminals, there is no excuse for the collateral damage that comes with targeting the technology.
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