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Comment by WJW | Hacker News Reader

> it's a lot easier for someone to create a new mixer

A secondary effect of sanctions is indicating what the regulators do and do not consider illegal. Up until now, it was at least marginally possible to state "But I didn't know it was illegal. TornadoCash was doing the exact same thing for years and never got into trouble". After this ruling, that excuse no longer applies and that might dissuade a lot of people who might otherwise be tempted to run a mixer of their own.

Also, reputation counts for a lot when it comes to mixers. A mixer that has existed for years is probably legit, a mixer that started up yesterday is a lot more likely to be a rugpull. Even if it will come down to whack-a-mole with the Treasury sanctioning new mixers as they pop up, it might be very difficult for any individual mixer to build up enough reputation to attract significant business.

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> After this ruling, that excuse no longer applies and that might dissuade a lot of people who might otherwise be tempted to run a mixer of their own.

What is interesting here, though, is that Tornado Cash doesn't run anything: they may as well not exist as an entity anymore. It also isn't a blockchain and doesn't have nodes: third parties thereby also don't run Tornado Cash.

Tornado Cash, instead, is one of many random contracts executing on Ethereum (as well as third-party Ethereum-like constructs; some/many of those are pretty damned centralized, with servers that process and store transactions, so I am gong to concentrate on Ethereum itself as it is the most interesting).

So, with the smart contract of Tornado Cash -- as Tornado Cash isn't a group of people or a company: it is just code -- having been sanctioned, if you are a miner and mine a block on Ethereum that includes a transaction that touches Tornado Cash, is that now illegal? I feel like this is how the concept of sanctions would normally play out in meat space with real people, to prevent the sanctioned services from being utilized.

If so, and I think this is where it "gets good": let's say 99% of miners care about the sanctions, and 1% don't... when you mine a block, you choose a parent for that block; arguably now, if you actively chose to accept a parent block that includes a Tornado Cash transaction, that should also be illegal (due to being sanctioned).

I can think of a few ways that more specific regulations could address this:

- It will not be legal for miners to run/"execute code on behalf of" smart contracts from the sanctioned list, which can be downloaded from the Treasury web site and is updated regularly. This is very akin to how the sanctioned people list works currently.

- The treasury will maintain a list of blockchain addresses that are known to contain tainted coins and all businesses need to verify they don't accept business when the payment comes from one of those. A little bit more tricky since you can send money from any wallet to any other one, but still this is how a lot of the current sanctions already work. You could imagine this being only applicable for companies with a banking or exchange license or something like that. Perhaps it would become a part of regular auditing done by accountancy companies.

- (Possibly the most likely depending on how much lobbying the crypto industry manages to get in) Miners don't have to do anything, but all crypto exchanges with users in the USA (in this case, I'd expect the EU and other big jurisdictions to develop similar rules over time) are forbidden from transacting with a list of addresses belonging to contracts available from the Treasury.

Options 2 and 3 are very similar, but 3 is scoped only to exchanges. Since the majority of users is not sophisticated enough to transact without exchanges, this seems like it would give the most bang for the buck for the Treasury. More sophisticated launderers could be tracked on a case-by-case basis if needed.

One thing I think is not very likely to happen is for the Treasury to say: "Oh well! Those crypto rascals outsmarted us by running their money laundering smart contracts on the Eth VM, so we guess money laundering is fine now".

I think an appropriate endgame would be an extension of #3: any regulated entity (e.g. an exchange) may not accept cryptocurrency which, anywhere in its history since the last time it came from a regulated entity, went through something sanctioned. This, of course, would mean that Monero would be right out.

In general, most of the supposed value of cryptocurrency seems to be that everyone looks the other way when parties do things that look like or are illegal but take the money anyway. Functionality, cryptocurrency is very similar to e-gold, and I see no reason it should be allowed to do the same things just because it’s somewhat decentralized.

> It will not be legal for miners to run/"execute code on behalf of" smart contracts from the sanctioned list, which can be downloaded from the Treasury web site and is updated regularly. This is very akin to how the sanctioned people list works currently.

This has come up in other contexts before, most famously the idea of using OP_RETURN to embed child pornography into the Bitcoin blockchain.

An Ethereum client must download and execute all transactions in each block in order to determine if that block is valid, and thus learn current state of the system. The client can't know if this "illegal" transaction has been executed until it actually executes it. As an operator you don't have any choice, other than simply turning everything off and "rugging" all your customers.

So let's say you're Coinbase. You have billions of dollars of other people's money, innocent people's money, in your custody. If you refuse to process blocks that contain transactions involving sanctioned entities, or that contain illegal child pornography, you destroy those billions of dollars of assets.

You're not going to make billions of dollars of assets unspendable. Not a snowball's chance in hell. You will process those blocks as the protocol requires. Doing otherwise would be as ridiculous as Google turning off its entire search engine merely because some of its automated actions technically violate laws from time to time. It would be like Intel razing a whole semiconductor fab to the ground because it learned that some of the sand used in creating some wafers was sold by a sanctioned country.

There is absolutely no way the US government is going to demand that kind of destruction of value as a matter of compliance.

If the government so desired, it could essentially seize all assets represented by the chain, establish an exchange rate, and open the window of the Federal Reserve to redeem tokens when a person provides enough identifying information to redeem their Ethereum for fiat. Essentially making everyone whole for some definition of whole to be determined. It's been done before, in fact, back when the country was fresh out of the Revolution and getting it's feet under it, and disparate currencies consolidated.

This is, in fact, exactly the kind of thing Governments tend to exist for.

This is a great example of where the law hasn't caught up to smart contracts.

We don't have a good framework in place for sanctioning contracts by address, contract itself, or by effect.

I'm expecting a push toward laws will evolve to make calling mixers illegal, but that will likely hit some 1st amendment push back. If money is speech, then is it free if it has no privacy?

> If money is speech, then is it free if it has no privacy?

I'm not a lawyer, but I don't think it follows that every financial transaction is a 1st amendment issue, just because spending money to promote a message is protected.

Money is speech, speech is free, ergo money is free.

Note: It is exceedingly rare for the free money to actually be so.

"if you are a miner and mine a block on Ethereum that includes a transaction that touches Tornado Cash, is that now illegal?"

Seems pretty obvious from the statement that doing business that includes this Tornado Cash entity will infect your business with criminal liability.

No entity. Decentralized smart contract.

Reply again?

Anything that exists and is uniquely distinguishable from other things is an entity. I didn't mean a corporate entity or government entity, I meant an entity on the Ethereum network in the form of a smart contract.

Or maybe, just maybe, ETH will soon be defacto illegal.

Edit: there is some "sort of" precedent. DeCSS was illegal.

TC mixer is different though, it’s smart contract/zero proof based. Once it’s deployed, it just continues to work. Owners can’t steal funds. If you believe that smart contract is implemented correctly, you can continue to use it.

TC utility is diminished by other fact - TC is blocked on exchange level, exchanges do not accept funds coming from TC smart contract.

On a tangent, are smart contracts automatically “open source” - as in anyone can see the source or is there a way to obfuscate what’s on the blockchain?

Smart contract’s binary code is visible to anyone once it’s deployed. (And it’s pretty simple to disassemble).

For most contracts they link actual source code to make inspection even easier - large part of trust in the system comes from the fact that contracts are inspectable.

All high profile smart contracts have reproducible and verified source code available on EtherScan.

An so just binaries which I guess means it’s not visible for all intents and purposes. Are there ready to go smart contract disassemblers?

example https://etherscan.io/bytecode-decompiler?a=0x610b8B78da143fC...

which uses https://github.com/palkeo/panoramix

Dissambly into Ethereum opcodes is doable, but do you find that readable?

You can obfuscate source code also--see what people do with JavaScript on websites--so the answer is "no" under any case. (In specific, though, contracts are implemented in a bytecode, so by more basic definitions of "open source" the answer is still "no".)

I thought one of the selling points was that everybody can check the contract...

Just because you don't have the source code does not mean you cannot inspect what a binary does by disassembling it.

(And as any programmer will tell you, just because you have the source code available does not automatically mean you can see where it has a tricky edge case with massive security implications. The obfuscated C contests are proof of that)

Just because contracts can exist whose code you don't have doesn't mean you don't know how anything works: not only can you build something on Ethereum that is open source and with verifiable behavior, that is currently the norm and obfuscated contracts are not taken seriously.

But why allow your business to be traceable to a mixer which will put you in scope of criminal investigations? Racketeering is not legal.

> Up until now, it was at least marginally possible to state "But I didn't know it was illegal. TornadoCash was doing the exact same thing for years and never got into trouble".

Oh I totally get that, but...

I reasonably believe in good-faith that it hasn't been categorically proven to be illegal. The reasons for this may seem obvious to many, but just it's not for anybody else then I'll give at least one persuasive argument. Illicit activity happens through legitimate financial transactions. For example, if I trade somebody a pizza for $10, how am I to know that $10 wasn't used in a criminal activity, ever, in the total existence of those note's circulation? And further, by using cash at all, as a concept insofar that cash is not rigorously tracked while in circulation, that the whole cash money system is illegal... Cash based economies to a great extent protect the privacy of participants. Those machines that make change, I suppose that's money laundering, and I would suppose they are laundering money for someone, but also... they be making legitimate 20x quarters from a $5 bill in a coin operated business setting. The quarter change making machine is the physical analog of a crypto mixer, but it's perhaps a bad example. Because making change for the sake of privacy is an unlikely activity, albeit a reasonable legitimate (if you ask me) activity.

I honestly would love to see more court precedence set on some of these so-called "structuring" laws where somebody intentionally "structure" or "laundered" money for the honest-to-goodness sake of legitimate privacy, or even for somehow being a form of free speech, something like that... to strike away some of these absurd regulatory powers before a panel of jurors.

> I honestly would love to see more court precedence set on some of these so-called "structuring" laws where somebody intentionally "structure" or "laundered" money for the honest-to-goodness sake of legitimate privacy

There's lots of court precedent for this. Courts have overwhelmingly found that the goverment's desire to access transactional data for tax compliance outweighs any right to privacy.

Courts generally find that just because there might be legitimate reasons to do something with money that doesn't override the requirement to keep records for for tax purposes.

>A secondary effect of sanctions is indicating what the regulators do and do not consider illegal.

No, it shows the exact opposite - that mixers are legal and the government has to utilize a completely arbitrary executive power to ban particular mixers.

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