#32 The Context: Crackdown - chilling effect or tornado in a teacup?
Tornado Cash accused of laundering funds for North Korea
Hi there. This week we look at the fallout of the Tornado Cash crackdown, the lingering fallout from the crash, and whether there’s room for crypto-skeptics in the community, or whether they’ll forever be a group apart.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased context. It’s aimed at anyone who wants to keep an eye on the space but isn’t following it too closely, or is on the hunt for story ideas and angles. It’s put together by a team at YAP, and doesn’t contain any promotion of our clients (if one is mentioned, we’ll flag that).
This was put together by a team led by founder Samantha Yap, and Jeremy Wagstaff, formerly of the journalism parish. Thanks to Roslyn Tear, Ruby Wu, Sam O’Donohoe, Joey Woo and Becky Corbel for their help and contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
A crackdown on Tornado Cash, a mixer accused of laundering illicit North Korean funds, sheds a light on both the limits of what regulators can do, but also whether sanctioning a protocol raises free-speech issues.
Terraform Labs’ Do Kwon surfaces for an interview, but some call it stage-managed.
Crypto skeptics organise a conference. Should we be listening more to what they’ve got to say?
[Tornado crackdown breaks ‘chilling’ new ground ]
The U.S. crackdown on Tornado Cash (see The Context #31) has raised some interesting questions, and, once again, the ripple effects are being felt. The important point here is that the crackdown is, for the first time, being done at the protocol level -- rather than wallet addresses, some of which have been on the Office of Foreign Assets Control's list of Specially Designated Nationals and Blocked Persons List (SDN) since 2018.
The Dutch police have arrested Tornado Cash developer Alexey Pertsev, and have warned other arrests may follow, as well as investigations into other Decentralised Autonomous Organisation (DAO) structures. Protocol explores the implications of this here: Alexey Pertsev’s Tornado Cash arrest: Who’s next?
It doesn't just involve so-called mixers. According to research company Elliptic, more than half a billion dollars has been laundered through one cross-chain bridge.
The WSJ's Caitlin Ostroff and Dustin Volz view the crackdown as showing the limits of crypto regulation, as evidenced when “users began trying to exploit perceived shortcomings in the government’s effort," not least in transferring funds out of wallets, as well as reproducing the platform's software code elsewhere.
Others predict a chilling effect, as described by David Hoffman on Bankless HQ. He points to Aave (and others) blocking addresses that have interacted with Tornado Cash, and concerns that U.S.-based exchanges preferring to comply with such protocol-level requirements.
Indeed Tornado Cash’s own DAO has already shut down. Liam 'Akiba' Wright of CryptoSlate quoted a DAO member as saying the closure was "to keep members safe and avoid legal issues."
Others see an attack on free speech. The Electronic Frontier Foundation argued that code has long been recognized as speech, so there are clear First Amendment implications whenever the government inhibits the publication of computer code on a public website. Seth Hertlein of Ledger argues a similar point here.
That view, however, has seen some pushback by those pointing to a statement by the Dutch financial crimes investigation service FIOD that some individuals involved in Tornado Cash are suspected of profiting from the laundering transactions.
The issue of censorship is a recurring one in crypto. Mailing list service Mailchimp has banned a slew of crypto companies according to their (apparent) no-crypto policy. The story may be more complicated than that. One customer, Digital Ocean, said it had dumped Mailchimp after a security breach.
[Do Kwon speaks, and other crash updates]
The long, long wake for those DeFi companies at ground zero of the crash is still underway.
Do Kwon, the disgraced co-founder of Terraform Labs, gave an interview. Even before it aired, it sparked a Twitter drama, mostly over who Do Kwon chose to give the interview too. That precipitated a heart-searching thread from the journalist in question, Zack Guzmán, who shared his thoughts on “bias and the ethical gray zones of being a journalist in crypto".
The interview itself prompted a variety of angles, suggesting it didn’t break any hugely new ground:
Indeed, there was some feeling that things were somewhat stage-managed. "This felt like a carefully constructed reputation recovery / damage control PR campaign, argued one Twitter user. More reaction here: Do Kwon breaking silence triggers responses from the community.
South Korea, already concerned about crypto, are widening their crackdown by blocking local access to foreign crypto exchanges that lack permits, according to Bloomberg. The collapse of Terraform Labs, creation of prodigal son Do Kwon, hasn’t helped matters.
New York Magazine, meanwhile, does a deep dive inside the crash of Three Arrows Capital, centring the tale around the $50 million boat they bought but will probably never set foot in.
Genesis Trading has become another victim of 3AC: CEO Michael Moro has stepped down, and the company will shed 20% of its workforce, after incurring huge losses from a loan to 3AC
Celsius, another name synonymous with the crash, is burning through cash at an alarming rate, and will be negative $137.2 million in a few months. At the end of July its liabilities outshone its assets by some $2.84 billion.
Coinbase, too, has been attracting heat. As crypto crashed, all around us, Coinbase allegedly stopped some notifications to users, according to Mother Jones
[Skeptics, Scammers, Cassandras and Polyannas]
Crypto has more than its fair share of scams, and this week is no different, as per below. Should we listen more carefully, then, to the Cassandras who saw it coming?
Naturally enough, if you attend a crypto conference chances are you won’t hear sessions that are critical of the movement. And there aren’t many of them, at least in any organised way, and yet they are (mostly) just as informed as crypto believers. They include, for example, Ben McKenzie, “O.C.” Star and Molly White,"the crypto world's biggest critic”, according to The Washington Post. According to NBC, after debating online for years, they're going to hold a conference of their own (it's in London, and it's sold out already, though you can join virtually for free.) We at The Context regularly include skeptics’ views in the interest of balance, and because the likes of Ms. White offer well-informed perspective.
And scam-wise, here are a few:
Hacked: DeFi Platform Acala’s stablecoin fell 99% after hackers issued 1.3. billion tokens, using a bug in the protocol's new liquidity pool.
Rug-pulled: Over $600,000 vanished from DeFi project Blur Finance and the developers have done likewise.
Scammed: Matt Henderson, head of product at Aurora, says he was nearly caught “by a fascinating and devious crypto scam during an OTC transaction”, which he details in a thread.
Second chance saloon: Martin Shkreli is back, a reformed man after serving his time, and er, may have gone again: Martin Shkreli Inu, his crypto lost 90% of its value after a major wallet dumped its tokens. The wallet appeared to belong to him, but he told Bloomberg he had been hacked.
[Tidbits]
We’ve probably written enough on Ethereum’s transition, but here are a few notes.
Some details about when, exactly, the Merge goes live, according to The Defiant's Samuel Haig.
Here's a discussion of how the ecosystem of participants, and the incentives involved, after the Merge.
The Tornado Cash Affair (see above) has nudged back into the open some concerns about how resilient Ethereum’s Proof of Stake would be to “social attacks”.
Oh, and the crash Chips demand evaporates as chipmakers plot new fabs • The Register
Taiwan has embraced web3. Taiwan’s Digital Affairs ministry is using a decentralised file storage to guard against mainland China cyberattacks following Pelosi’s visit, according to the South China Morning Post. Decrypt says that Taiwan has turned to InterPlanetary File System, or IPFS, designed in 2014 and using a pre-crypto decentralised protocol call Torrent. IPFS has been used in conjunction with Ethereum to store files, filling a hole that Ethereum wasn't designed for.
Pension funds remain interested in crypto despite crash: The Block
Regulation: Indian authorities freeze more crypto funds over money laundering allegations and UK seeks guidance on how to regulate crypto, digital assets
[Events]
EthMexico | August 19th - 21st | Mexico City, Mexico
Coinfest Asia | August 25th & 26th, 2022 | Bali, Indonesia
Cryptocon Global | August 26th, 2022 | Scottsdale, Arizona, USA
DeFi Security Summit | August 27th - 28th, 2022 | Stanford, California, USA
The Science of Blockchain Conference 2022 | August 29th - 31st, 2022 | Stanford, California, USA
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: ‘Stablecoins’ by Roslyn Tear.
Stablecoins have been the talk of the town in 2022 and not for the right reasons, in no small part due to Do Kwon’s TerraUSD losing its peg to the U.S. dollar in May. The spiral has led to a string of attempts to legislate stablecoins, but also people coming to the defence of stablecoins, blaming bad collateral - a concept familiar in traditional finance.
Stablecoins are cryptocurrencies that derive their value from what they are pegged to, whether that be a currency such as the dollar, commodity or financial instrument. They aim to maintain stability by maintaining reserve assets as collateral or through algorithms that control supply levels.
As the name suggests, they are designed to remain steady and provide an alternative to high volatility assets such as Bitcoin which have less utility for day to day transactions, with stablecoins making for a better medium of exchange.
Types of stablecoins include fiat collateralised, crypto collateralised, commodity collateralised, and algorithmic stablecoins – of which terraUSD was one – proving to not be so stable after all. While scrutiny and proposed restrictions by regulators are looming, Miles Jennings, a defender of stablecoins suggests it’s not the algorithms which are the problem but rather the collateral design.