Tornado Cash verdict has chilling implications for crypto industry

    20 May 2024
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    The conviction of Alexey Pertsev, a developer of coin-mixing protocol Tornado Cash, comes from a chilling interpretation of criminal liability likely to have wider ramifications for crypto.

    The Dutch court’s guilty verdict means Pertsev must now serve a sentence of five years and four months for money laundering through Tornado Cash. This is despite the fact that Pertsev had no direct involvement in the laundering itself.

    Andrew Balthazor, a litigator with the legal firm Holland and Knight, spoke with Cointelegraph to explain the implications of the verdict.

    “Mr. Pertsev’s conviction reinforces the views of several governments that software developers who make their software available to the public will be held liable for the foreseeable consequences of the public’s use of that software,” said Balthazor.

    “Under this theory of liability, it is no defense to disclaim knowledge of a specific criminal act or to point to the software’s technical limitations in preventing its misuse by criminal actors. […] It is the developer’s responsibility to create mechanisms to reduce or prevent foreseeable criminal use of their software.”

    When asked if the governments taking that view included the U.S. Balthazor said, “Yes, that appears to be the position of the U.S. as demonstrated by the Tornado Cash indictments brought domestically by the DoJ – [Department of Justice].”

    This interpretation of liability significantly differs from how most understand it in the traditional sense. Natalia Latka, director of public policy and regulatory affairs at blockchain analysis firm Merkle Science, told Cointelegraph how the theory has progressed over time.

    “Historically, software developers were seen as neutral creators of tools and platforms, responsible for their technical functionality but not for how those tools were used,” said Latka.

    “This perspective largely stemmed from the idea that technology itself is neutral, and its use depends on the intentions of the users. This perspective has been shifting, especially with the rise of decentralized networks that challenge traditional regulatory frameworks.”

    Latka explained that developers “must now consider the legal implications and potential misuse of their creations.”

    Crypto understands impact of court decision

    The crypto community quickly grasped the importance of Pertsev’s trial, taking to social media to condemn the conviction.

    Eléonore Blanc, founder of CryptoCanal — the events firm behind the ETHDam conference in Amsterdam — took to X to discuss the implications of the trial on social media. She conducted a thought experiment to ask whether “Tornado Cash” could not just as easily be “any cryptocurrency of your choice.”

    Blanc told Cointelegraph why she found the case so concerning.

    “They’ve systematically disregarded all arguments from the defense,” she said. “As such, you can easily extrapolate and see how this specific court verdict could be interpreted at a larger scale to more use cases in the crypto industry.”

    Blanc went on to further personalize the ruling on X, stating, “As crypto builders, we are all Alexey. We keep fighting for him, his legacy and the cypherpunk values.”

    Fewture, another X community member, went on to consider what this model of liability would mean if it were applied outside the world of software development.

    Balthazor argued that if community members instinctively knew how dangerous the ruling was for privacy, there would be further ramifications to consider.

    Risks to immutability and decentralization

    The first and most obvious casualty of the Tornado Cash ruling may be privacy, but this is not the only challenge stemming from the case. The immutability of the blockchain and smart contracts is also at risk.

    “This theory of liability renders immutable smart contracts highly risky for developers to make available to the public,” said Balthazor.

    “Reducing risks to developers may require publicly available programs be amendable so that software developers can respond to law enforcement or regulators’ requirements.”

    “For example, certain stablecoin issuers possess a feature allowing the stablecoin to blacklist blockchain addresses controlled by sanctioned entities. Failing to include such a feature would increase the risk to those issuers of their stablecoins being used by sanctioned entities,” he said.

    Balhazor concluded that the ruling “increases the risks associated with decentralized projects” because their “decentralized nature may make course corrections difficult due to the consensus needed to make major code or operational changes.”

    Turning the screws

    With Pertsev receiving such a punitive sentence, it’s understandable if blockchain developers are now nervous about potential legal action.

    Latka said that “compliance by design” will become “crucial for developers and organizations in the crypto space. This involves integrating regulatory compliance into the design and development process from the outset.”

    This is because “courts will assess whether developers knowingly created tools for illegal purposes or were willfully blind to their misuse, with evidence of intent or negligence significantly impacting legal outcomes.”

    But if developers have to sacrifice privacy, immutability and decentralization to protect themselves and make their protocols compliant by design, what will remain of blockchain?

    Source: https://cointelegraph.com/news/tornado-cash-verdict-crypto-industry

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