Crypto prices have been crashing in the past two weeks. I don’t know if it’s just a coincidence but the 25% crash corresponded with the Tornado Cash ban from the US Treasury. rekt.news had a great article about the implications of this ban. Can the actions of a single powerful government affect the entire network? How much, if any, censorship is acceptable?
When the Tornado Cash ban was first announced, we were seeing front-end screening from DeFi protocols. In fact, my wallet was briefly flagged and I wrote a post complaining really loud to get unblocked (, presumably by TRM labs, whose centralized service assesses and flags*high risk* wallets using AI but is apparently not very good). The crypto community started to realize that blocking the front-end is not enough to assuage the regulators. Regulators are not dumb. What happens if regulators demand the sanctioned addresses being blocked at the blockchain level? Namely, the blockchain miners/validators would ignore proposed transactions that include sanctioned addresses. In fact, the miner/validator level filtering is being implemented by some volunteers. This is a bit scary. Imagine that the USA and EU decide that all the validators/miners physically located under their jurisdiction have to comply with their rules. The anti-censorship features of blockchains would then cease to exist. If the blockchains decide this is not acceptable and move their validators out of the USA and EU, then the question becomes if there would be enough decentralization to make the blockchains function well. How useful would a blockchain be if a blockchain loses either its anti-censorship or decentralization feature? That is an existential question for the crypto community to think about.
Now the US government is banning things that are obviously criminal. But what prevents them from applying regulations to the on-chain world in the future if we keep going down this slippery slope? Will Uniswap be banned because it’s not a registered exchange? Will Aave be banned because it’s not a licensed lender? Will Perpetual Protocol be banned because perpetual contracts are illegal in the US? I am not talking about banning by blocking frontends here. I am talking about banning by blocking at the blockchain level if the validator/miner nodes are physically located in the USA. I personally think it would be the end of the wide adoption of blockchains if regulators are able to push this far.