The Breakdown - How Much Privacy and Decentralization Really Matter, Feat. Jill Gunter

Starting point is 00:00:00 Privacy in crypto, unfortunately, has become close to synonymous with illicit activities. And that need not be the case. You know, we have the tools in the technology to make it so that there can be more nuance. It's certainly desirable to have full privacy, even governmental level privacy, if you are a dissident in Hong Kong trying to raise funds, or if you're a women's rights activist in Nigeria trying to raise funds. Or, I hate to say it, if you were in North Korea, trying to money launder. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and Ft, and produced and distributed by CoinDisc. What's going on, guys? It is Thursday, August 11th, and today we are discussing how much privacy and decentralization really matter.

Starting point is 00:00:57 Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Finally, this week I am thrilled to welcome NIR as an additional sponsor. NIR is a revolutionary yet simple Web3 platform for building decentralized apps. Designed by developers, four developers, over 700 projects are now building on NIR's fast, secure, and scalable protocol. Whether you're a crypto-native launching defy apps, NFT marketplaces, and play and

Starting point is 00:01:36 and earn games, or looking to migrate your project from Web 2, NIR makes it easy to build Web3 for the masses. NIR offers developers a variety of tools, resources, and support for building apps, empowering communities, and creating a more fair, inclusive, and equitable future. Start your Web3 developer journey now by visiting NIR at nir.org. So, as I think is pretty clear from Twitter and just general crypto discourse, the big story of the week is the tornado cash sanctions by the U.S. Treasury Department. However, the story isn't just about a specific set of sanctions. It's, of course, about the implications. Today, I'm joined by Jill Gunter. Jill is one of the folks behind the Open Money Initiative, which looks at the relevance of crypto and blockchains around the world in developing regions.

Starting point is 00:02:21 She's also an investor personally and as a venture partner with slow ventures. And finally, she's now building new approaches to crypto privacy as chief strategy officer at Espresso Systems. Jill has long been one of the more thoughtful folks in the crypto industry when it comes to questions of privacy and decentralization, and those I believe are the domains of some of the most important questions coming off of this news. On today's show, we dig into what happened, why the U.S. Treasury Department might have chosen an action that seemingly leaves them open to much legal recourse and why part of the answer might be technological, not political. All right, Jill, welcome back to the breakdown. How are you?

Starting point is 00:02:57 I am doing well. It's been quite an adventurous week, hasn't it? Indeed. Indeed. Yeah, it's, I mean, this one, we've touched on some of these topics before, but I feel like a lot of very theoretical conversations are becoming not so theoretical right now. And I'm super excited to have you back on to chat about all that. So I want to start, I think, just, you know, from the, from first reactions to, you know, waking up and seeing this news on Monday, morning. What were your first thoughts? What were your first kind of instincts? And then we'll kind of explore from there. Yeah. No. And I mean, just to put this in context, one of my favorite ever theoretical conversations that I've had with anyone about privacy was when I was last on the show a few months ago. And we touched on a lot of these themes and topics. And as you say, now it's all kind of playing out in reality and we're getting to see the fallout. And so I think it's kind of an exciting time from that perspective, but also kind of a scary time, to be honest, to be in the industry and be building, because it feels like there's a lot hanging in the balance

Starting point is 00:04:05 and a lot at stake. But yeah, when I woke up and I saw that I'm on Pacific time, so it was when I woke up that I saw the news about tornado cash, I had mixed reactions. On the one hand, my gut instinct was kind of like, yeah, of course. We all knew that North Korea was using tornado cash as a mixer. We all knew that that was going to be a problem, you know, for the world, but certainly in the eyes of the U.S. government. And, you know, I think that it was probably pretty self-evident to anyone who's not totally naive and has worked in the space for a while and has kind of been watching where the puck is going on these things, that there was going to be a moment of reckoning around this

Starting point is 00:04:55 and around probably Tornado Cash specifically. That said, I think that the way that this is playing out and the fact that it is playing out as a sanctions action against Tornado Cash, the smart contract, right? Like not an individual associated with Tornado Cash, not an entity associated with it, but the smart contract, the code itself, and the fact that this is being carried out by OFAC, that's the surprising part. And that's a much more nuanced, I think, issue to discuss and to

Starting point is 00:05:32 unpack. I think that you did a great job of doing it the other day on the show. I learned a lot from that, even myself, even as someone who's dealt with having to comply with OFAC lists before and dealt with kind of the gravity of them. But again, I think that that's probably the piece that's the most interesting to talk about and also taking the industry as a whole, the most by surprise here is the way that this enforcement is being carried out. Yeah, so let's talk about that a little bit because I agree. I think that the U.S. government had not been unclear about its feelings on mixers, right? and this particular type of technology, maybe let's frame it as a counterfactual.

Starting point is 00:06:15 If you were to have guessed or be forced to guess kind of before this week, what type of action, you know, how would you have seen that feeling expressed? You know, did you anticipate that the U.S. would do some sort of kind of, you know, regulatory just banning of kind of that type of technology or, you know, versus the sort of sanctions approach? What wouldn't have surprised you, I guess, is maybe a better way to put it. Yeah. And to be honest, I hadn't thought about it deeply, actually. I had thought about it to the extent to which I could kind of believe and foresee that something was going to happen at some point to discourage the continued building and development of tornado cash, to discourage U.S.

Starting point is 00:07:01 persons from engaging with the tool and the technology. But I hadn't, and I'm not a lawyer, right, So, you know, I hadn't sort of gotten into the weeds and how that might play out. If you had told me, if you'd come back from a week in the future and told me that something was going to happen here with OFAC and sanctions, I would have guessed, based on my knowledge and understanding, you know, somewhat experience of having to comply with these things, that it would have been people associated with tornado cash. So, you know, the lead developers on it, the founder of the project, et cetera, who were maybe being sanctioned. I would have guessed that certain addresses that were interacting with tornado cash might be sanctioned. There is a history of OFAC sanctioning Bitcoin addresses, other cryptocurrency addresses. And so that wouldn't have surprised me. But both of those things are very, very different from actually putting a smart contract address on the sanctions list, right?

Starting point is 00:08:03 where the smart contract itself is an open source bit of software and code that is arguably, you know, independent and a neutral tool. This is what many people are arguing right now, of course. And that's a very different, perhaps even unprecedented thing for OFAC to do versus, again, sanctioning a person or an entity or indeed an address, you know, as kind of a public key that is in a way, you know, just another, another alias for the person themselves. So as I've been reflecting on this, I've had kind of like this cascading set of thoughts as relates to this. And the first is this feels like it opens them up to legal challenge that

Starting point is 00:08:51 other types of action against Tornado Cash or any other mixer might not have. So it's like the surface layer. It's like, okay, why would you open yourself up to, you know, I mean, this is the type of thing that can have long, drawn out, protracted legal battles. And in fact, it sort of, it feels inevitably to me that this type of issue, the precedent that we had before was inevitably going to be challenged once again in this new cycle of privacy technologies. So it's not all that surprising that we would see an example of this. But again, from a practical standpoint, first question is like, why do this in this way when it opens yourself up to such legal challenges? But then my second thought was, it seems like maybe they don't care.

Starting point is 00:09:32 in the sense that legal challenges take a really long time to play out. And it's quite clear that part of what they're going for is also signaling power. Like, yes, they want specifically North Korea to stop being able to use this particular tool. But more broadly, I mean, they made this clear in the connection with Blender and all these sort of things. They want people to think twice before engaging in any of this type of activity. And like they said that much more explicitly than seems. almost cooth, you know, in some ways. Like they were kind of like very out with that.

Starting point is 00:10:06 And so it feels to me like it's a localized and a more generalized action where it's fine with them that like they'll go fight the legal battles because it doesn't matter even in some ways if they lose them. They haven't cut themselves off from other types of kind of activity or ways to prohibit this type of mixing activity. And two, in the short term and medium term, which is really where the focus is, like the effect is the same, right? No legal challenge is going to be mounted.

Starting point is 00:10:32 that quickly. I think you're touching on a bunch of different interesting dynamics here, one of which is this action that they've taken, they surely know, they surely know better than I do that this is unprecedented, right, for them to put a smart contract on the SDN list. And they also can surely then predict the degree of complexity in terms of enforcement, in terms of the legality of this action in terms of the precedent that it's setting. All of the complexity here, not even to mention, of course, you know, things that we're probably watching closely, maybe more closely than they are right now, of people sending tornado cash transactions to like Jimmy Fallon's ETH address and, you know, sprinkling dust from tornado cash to all of these, these high profile

Starting point is 00:11:23 individuals sort of to try to make the, you know, presumably these are people trolling to try to make the point of like, you know, how is this going to be judged and characterized? There's so much messiness and complexity here that you're right. Surely, surely they could kind of see and predict there was going to be some fallout. And I think part of what you're getting at and part of my understanding from speaking to folks who spend a lot more time in Washington than I do is that this seems to be somewhat politically motivated, right? I think that that's part of the subtext of what you're saying. That this is not only a shot. across the bow towards the crypto community of builders and developers, people working on privacy

Starting point is 00:12:05 projects and protocols to the community of people who use these types of things, maybe for totally legitimate, licit purposes, but probably their shot across the bow is more geared towards those who are using it for illicit purposes, of course. But if they could see all of the problematic complexity playing out, then there's clearly, I think, additional motivation at play here. And again, it would not surprise me based on what I've heard and understand if a lot of that was also more politically motivated and making kind of a statement. In terms, though, of the legal side of it, right, of who's going to fight the legal battle against them on this? If there is one to be fought, again, I'm not a lawyer. I don't know. I have kind of my own views in terms of.

Starting point is 00:12:57 interpretation on on what might happen here based on my understanding of kind of the the precedent around trying to to censor code and code being speech but you know there's a really interesting question at play of who's actually going to bring the legal battle to them like who is it who then represents tornado cash and puts themselves on the line to go and fight this when ostensibly, I mean, the argument at least is that this is just, you know, an open source piece of software. And so I think that that's a really interesting question that still has yet to be played out. Haley Lennon, a lawyer in the space with Anderson Kill, wrote a great piece about this in Forbes earlier this week and touched upon that question of the fact that there isn't anyone to bring the

Starting point is 00:13:47 delisting back to their door, at least not clearly as of yet. One other thing I'll say on this matter, though, is I loved Miller White House Levine, the policy director for the Defi Education Fund, actually filed a written snail mail Freedom of Information Act request right back to Treasury and OFAC, asking for clarity on a whole bunch of the unanswered questions here. Like, who is the entity associated with tornado cash who's actually being sanctioned? You know, how did they decide on kind of the ratio of illicit to live? activity that tripped the wire here that led to this decision being made. And so, you know, I love the kind of initiative of folks like him of just the bias for action and going right back at it and trying to get, I think, very genuine authentic clarity here on how this happened and what plays out next. Yeah, I thought that letter was pretty awesome too. And I'm very

Starting point is 00:14:50 exceeded to see what the response is. You know, I think that the, when it comes to the who will fight this, it's a really interesting question because I kind of think that the expectation that you're seeing with the community might be a little bit off in the sense that I think that they're expecting, or at least they are implying that they expect. And obviously we're painting with a very broad brush here, someone like a circle who has to make specific decisions, right, around around compliance being the person or entity to fight, when in fact I think it's far more likely that either A, a group who already exists,

Starting point is 00:15:27 whose entire job it is to fight this sort of stuff, or be some weird consortium that arises specifically to fight this, is the actor, right? In the sense that it feels like there has to be just completely practically, a pretty clear separation between organizations, regulated in the United States who have to comply with this because for now this is what it is, versus, you know, who is going to actually fight the underlying kind of, you know, legal principles principles behind it. You know, basically, I don't think it's realistic for major institutions

Starting point is 00:16:01 that are regulated by the U.S. to expect to be sort of noncompliant in some defiant way, you know, or even at the front lines necessarily of fighting it. However, I think that there's probably quite a bit of money to fight it for whatever entity or actors decide that it's the battle that they want to take on. Totally. And I think that's a really great point in terms of just the question of who is actually incentivized to bring this back to their doorstep and actually fight it. Who is incentivized to put themselves on the line in that way? It's sure as hell not going to be an organization, a corporation, that has fiduciary duty to their shareholders to, you know, stay compliant with the law and to not get mixed up in, uh, in these types of actions, but rather to, you know, keep their heads down,

Starting point is 00:16:52 keep building and shipping, creating shareholder value and whatever it is. You know, on some level, you might argue that it's other people who are working on privacy oriented projects who might be feeling some kind of existential threat coming from this. But I mean, I'm working on a privacy-oriented project. It's, it's, you know, a very different kind of value proposition from anything like a mixer. But, you know, I can tell you that I think anyone who's working on a privacy project is probably not trying to get mixed up in this at this point in time, but instead is going to be looking for kind of longer-term clarity and also looking for others, you know, from more kind of an activist angle or who are, again, you know, their whole raison d'etra is to be in a position

Starting point is 00:17:37 to fight these types of battles to do that on their behalf and on behalf of the industry. But I want to touch also on something that you just brought up, which is Circle and their position and all of this. Because of course Circle, it seems like many were unaware of this. I was unaware of this until relatively recently until maybe about a year and a half ago, which is relatively recently for someone who's been in the space for seven or eight years as I have. But a lot of people were unaware, I think that Circle has freezing capabilities over USDC, that they can halt transactions in any given pools of USDC at will. And Tether has this same capability. You know, it's not just Circle doing this. This is, I think, a fairly common feature set to have for a centralized stable

Starting point is 00:18:29 point. But if you look at the outcry and if you look at the responses to, you know, Jeremy Allaire posting on Twitter with, I think, a very balanced and reasonable explanation of Circle's position of why they had to freeze the $75,000 plus USDC that was in tornado cash or touching it at the time. You can see that there's a huge issue there around user education and user consent because we're in an industry that loves to market everything is decentralized and censorship resistant, yada, yada, yada. but when the reality is different from that and deviates from that, I think, for good reasons in circles case. You know, I think that USDA, even as something that isn't providing government-level censorship resistance, is adding a lot of value for a lot of people and participants in the ecosystem. But it's important, again, that the people who are using it understand what they're consenting to in terms of the level of decentralization or censorship resistance or whatever it is that

Starting point is 00:19:34 you want to characterize it as. And that, I think, is a whole other conversation. I know you love narratives that is going to play out around all of this in the days and weeks to come of just really having to educate users at a better level on what they're actually agreeing to. In times like these, security of your assets should be your number one. priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's

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Starting point is 00:21:18 One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCs, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. So I think there's a user education element, but I also think that the, maybe even the more significant conversation in some ways is like, the crypto industry hasn't really finished with itself, the conversation about where and in what ways decentralization matters,

Starting point is 00:21:54 for what use cases, is there a range of decentralization that is allowable for different types of applications and functions? And a huge amount of stupid fights, I would characterize them as, result from a presumption in some ways that, A, all things are equally decentralized and B, that they need to be, rather than having kind of a nuanced take or understanding on what purpose decentralization serves in different contexts, right? So there is a world in which big swaths of defy, it is fine for them to have only moderate decentralization because the function that they are playing are not the sort of life-saving need to get around authoritarian financial regime type of use cases. They're just a better mouse trap that's faster, more efficient, more interesting for financial plumbing. You know, maybe that's not what one values or wants to work on, but it's a theoretically plausible. scenario. But we have never, I think, on mass gotten to that level of granularity as relates this decentralization conversation. And it feels like this is the inevitable thing. I mean, so the obvious part of this is how decentralized can defy be if it's centralized stable coins that are the reserve asset of this space. And a lot of people are kind of recognizing

Starting point is 00:23:16 that USDC in many ways more than Ethereum is the reserve asset of defy, functionally speaking, right? And so it feels to me like that's a big part of the conversation that needs to happen. Again, just sort of this is all amongst ourselves. This has nothing to do with the U.S. government, but it's just sort of internal expectations about what the function of decentralization is. And then also how we talk about that and how we market these things, right? And whether it is fair or right or even make sense to market things as decentralized, as a sort of teleological ambition in of itself, right?

Starting point is 00:23:56 You know, we should be talking instead, as you're saying, about the value prop of these things. And you can take this levels down, right, where now there's this whole outcry around die and how much of die is collateralized by USDA. And if that's the case, what is even the point? And, you know, if that is the case, then what are the risks that people aren't factoring in when it comes to die in terms of what might. might get frozen at any given time. I think that these are really important conversations to have.

Starting point is 00:24:25 And you can take it down even a level from that, I think, to have the conversation about how decentralized is Ethereum even, right? Where, you know, if you have in Fura, which is one of the kind of foundational service providers at an infrastructural level to Ethereum, blocking RPC requests to tornado cash, as they are now, then suddenly you have this question of, well, wait a second. and how decentralized is the underlying protocol even itself if it becomes infeasible or at a minimum inconvenient for the average user to be able to access it. And these are conversations that I think the industry has been starting to have over the prior months, maybe even the last year,

Starting point is 00:25:08 around things like front ends. But I think it's imperative that we start asking these questions at lower and lower levels of the stack itself and of the applications themselves. And I actually think that this is a really healthy thing to explore. I think that this could help guide the industry towards having a much stronger argument around the value prop that it provides when it doesn't just come down to censorship resistance. And as you say, I think that we've seen glimmers of that in DFI protocols that acknowledge that they aren't necessarily, you know, fully decentralized or fully censorship resistant in the way that sort of, you know, the original.

Starting point is 00:25:50 cypherpunks might have imagined, but can still provide value to their users that's undeniable. So, yeah, a lot of big conversations to be had about the nature of decentralization, even besides the conversations around privacy that have to play out here. Yeah, it's interesting. I mean, I think that had open finance or permissionless finance won out as the like go-to term. It's so much less pithy, though. It is. And sort of that ease of, I mean, it's a better kind of acronym to have Defi, you know. But, you know, I also think that part of the issue as an aside, which I will not walk us down this rabbit hole, is that the vast majority, let's say, of conversations about these important topics start as gotchas on Twitter. And that is a really bad way to have important conversations. But again, lest this become a maxi debate. No, we'll avoid that. Yeah, I was worried that this was going to tread into proof of stake, Ethereum territory once I said the thing about the decentralization of Ethereum itself. I don't want to go there. But I do think that that's so true that the sort of gotcha nature of these debates as they often play out really skips over the nuance. But that in a way is the beauty and opportunity of this moment where we have to reckon with what is the degree of decentralization that makes sense and matters.

Starting point is 00:27:20 in different circumstances, because that's going to vary. And then also a point that I want to bring up that I think is being totally lost here is what is the degree of privacy also that makes sense for different people, different types of users in different circumstances. Because I think just in the same way that we have a tendency as an industry to talk about all or nothing decentralization. And, you know, you're either a fully decentralization maxy Bitcoin or Heathhead, whatever, who's talking about how Solana is actually built on SQL. You know, you kind of get into this, this binary conversation around decentralization.

Starting point is 00:27:59 The same thing plays out when it comes to privacy, where people will either say, yes, this is fully private. You know, Manero is the only privacy solution that you can actually trust. It's the only one without compromises or backdoors. I'm just using that as an example, but, you know,

Starting point is 00:28:15 people will pick their sort of privacy solution of choice and say that this is the right one, to use. This is the best one because it has the most robust privacy guarantees. Or they'll say, you know, well, the only other option out there is totally binary again is to use something that's a fully transparent system, you know, that has the level of transparency of Ethereum or Bitcoin. And the reality is that the vast majority of users, I think, want some level of privacy in many of their transactions. Maybe it's not even most, but in many of their transactions. But they don't necessarily need tornado cash level of privacy. And I feel like I'm sinning,

Starting point is 00:29:00 as I'm even saying this, right? Because it does kind of fly in the face of a lot of the sort of cypherpunk underpinnings of the industry. But today, you know, privacy in crypto, unfortunately, has become close to synonymous with illicit activities. And that need not be the case. And that need not be the case, right? You know, we have the tools in the technology to make it so that there can be more nuance to it. And that also is not desirable, I think, for the vast majority of users. It's certainly desirable to have full of privacy, even governmental level privacy. If you are, you know, a dissident in Hong Kong trying to raise funds or if you're a women's rights activist in Nigeria trying to raise funds, or I hate to say it, if you're North Korea, you know,

Starting point is 00:29:44 trying to money launder. But there's a lot more nuanced. to be found in between those extremes, again, both on the privacy side and the decentralization side. So going back to the sort of discussion of the politics or potential political motivations for this, obviously I have no insight. I have no conversations. I'm not in D.C. I'm not even like a Beltway, I'm not even a Beltway outsider, much less a Belway insider. However, there is something kind of like, if you look at the trend line of U.S. government conversations as regards crypto regulation, I think that it is far, far better, more productive and healthier today than almost anyone would have guessed at about a year ago when we were fighting the infrastructure bill battle, right? It has trended really, really positively for us in terms of people being engaged, thoughtful, learning more, right?

Starting point is 00:30:33 I think that you saw Congress and the Senate actually kind of take up the mantle and understand that if this is a new industry that's important, it's got to be them determining how it's going to be regulated. They're not just going to leave it to the agencies. The Biden executive order was sort of a picture of restraint and sort of deliberateness. Absolutely. Relative to where especially it seemed like Treasury was heading. And, you know, the word on the street was that there were a lot of battles internally between Treasury and everyone else as regarded the executive order. So if you are then in Treasury and where are you going to draw your line, right? The thing that you are not going to let go away, there is basically nothing that is sort of more central to,

Starting point is 00:31:14 the way that the U.S. financial establishment, from a government perspective, views itself as the Bank Secrecy Act and everything around KYCAML. I mean, that is a legacy of the last 20 years, right? That is the sacrosanct, like, willing to kind of infringe on old principles and rights sort of thing, right? And so it makes sense that this is the line. What's more, by going after Tornado Cash, which we know, and everyone agrees, to your point, has been used by North Korea. They're sort of forcing a a bad fight into crypto's hands, right? It's like, is this really going to be the hill that you die on? Absolutely. This particular mixer. And privacy, it feels like, has at least three dimensions if we're going to have the full conversation. One is, what is the sort of the politics of it,

Starting point is 00:32:02 right? Some of the stuff that we were just talking. Second is what is the moral or ethical principle that gets expressed in legal form, right? Like, what do we imagine? What is an appropriate privacy, right in the context of digital money versus paper cash, right? That's something that's going to be a fight. But then there's a third part, which is technological, right? Which is like, what are the actual tools available and is there space between these kind of two poles? And maybe let's just have you kind of articulate, this is something you wrote about earlier this week, that for most of Web3's life, there's been two very extreme poles of privacy and there may be some middle space, but I love you to just kind of expand on that a little bit more. Yeah, no, that's right.

Starting point is 00:32:43 And this is something that, as you know, I'm super passionate about bringing nuance to a conversation around. Because as you say, privacy gets so bogged down in the moral imperatives behind it, in ideology behind it, in the politics of it, all of this. And I think that it's important to acknowledge that sometimes privacy, when done right at its best, can actually be quite mundane as a user requirement. of a product as a desirable, you know, feature of something that I'm engaging in, whether it's online or in real life or whatever it is. And those privacy needs can be met, again, with more nuance than, you know, a tornado cash-like mixer would bring to the table. And I think that cash is actually an interesting example to start with on this, because, of course, a lot of crypto folks have, the immediate outcry in the wake of all of this is, well, you know,

Starting point is 00:33:49 how much money laundering has happened with physical hard dollar cash over the prior decades? And how does that compare, you know, how does the ratio of licit versus illicit activity in physical cash compare to that, which is played out in tornado cash? Well, cash, of course, we all like to think and talk about in the crypto world that cash is this kind of paragon of financial privacy. It's the original kind of bearer asset, right? It's the original peer-to-peer asset. It's, of course, what Bitcoin was based on peer-to-peer digital cash. But cash, of course, also has some ways of being tracked, right? You know, it has serial numbers. And there are ways that it does get tracked as it moves through the system. There are

Starting point is 00:34:37 dollars that get decommissioned because they've been associated with problematic or illicit behavior and so on and so forth. And so when you recognize that even something like that, that we hold up as this paragon, does have these markers of being able to be tracked, I think that it does start to open up the conversation, again, to a little bit more nuance of the spectrum of products that can, and I would argue, really should exist so that all privacy does not get lumped together with North Korea and the activities there. And I don't necessarily want to open up the can of worms on whether, you know, fully anonymous mixers should or should not exist. I think that's a very fraught conversation.

Starting point is 00:35:26 And I can really argue and see both sides of it. But I do think that some forms of privacy should exist within crypto, within Web 3, within Web 2, we got that really wrong. And I think that if we're going to get it better this time around, then we need, again, to have greater nuance. And again, fortunately, you know, we have the tools for this. I'm really excited, as you know about the promise of things like zero knowledge proofs to add more nuance to this and to actually enhance what we can do in terms of digital privacy guarantees for people, even over and above what exists today within centralized systems in terms of the ways that people can protect their own identity information, their own transactional information, without necessarily having to go to the

Starting point is 00:36:13 extremes of a fully anonymous mixer, but certainly improving on what exists today on the Ethereum network. One of the things that I think about a lot when we bring up the cash example, it very much feels to me relevant from a legal challenge standpoint, you know, for any of these questions, but I'm not a lawyer. Where I think it's less useful than people might imagine is that bringing up cash as a precedent assumes that the U.S. government validates and values cash versus it just having been the only option as things were evolving then, right? Like, if this was a vow renewal ceremony, I do not believe that the U.S.

Starting point is 00:37:01 government would be interested in renewing with cash as is, right? And I think that's going to be obviously the central debate in some ways, or one of the central debates, as relates any sort of central bank digital currency or a digital dollar in the U.S. And you already see some of those lines kind of starting to be not formed but tested with public statements from different officials as they kind of, you know, walk down the CBDC path. I think that's obviously so secondary right now to, I mean, not even secondary, tertiary, to anything that anyone is thinking about, even if they're looking at crypto and stable coins, that it's not been a major

Starting point is 00:37:37 conversation. But yeah, I do think it's interesting. There's a sort of presumption that that the U.S. government would actually like cash in its current form. And I just don't think that's the case. Yeah, I think that that's spot on. And I do think that it's important, as we're all kind of boggly down, heads down as we should be in looking granularly at the tornado cash situation and how it's going to play out to look up a little bit and look at the knock on effects that this might have on all of these bigger questions around how CBDCs may or may not play out, on how stable coins may or may not be classified and allowed or kind of sanctioned, not in the sense of sanctioning tornado cash, but sanctioned in the sense of being given a blessing by governments

Starting point is 00:38:25 around the world. Those things may or may not happen, but I think that this, this action and what's happening with tornado cash right now will have ripple effects on all of these things that I know that, you know, you've been following, I've been following the industry has been following for months now. I do think that this is a watershed moment for all of those issues. The default response to this conversation around privacy, I think, which makes sense, is political and legal, right? Those challenges. You know, you're spending all of your time now on the technology solutions to, you know, privacy barriers. How much do you think that expanded technology choice can actually help even the political conversation because it creates more options for? for compliance that still respects privacy? Very genuinely, that is my motivation every day, is to create options that expands the conversation,

Starting point is 00:39:29 happening at a policy level, happening at a product level, amongst other builders and innovators, away from this very binary notion of privacy, in an effort, actually, to protect privacy so that we don't throw the baby, out with the bathwater here and say, well, we've proven that this black and white notion, you know, full privacy is not going to be viable, that that's just going to end up being used by those who are trying to evade sanctions and for illicit activity and all of these problematic

Starting point is 00:40:03 things, again, as viewed from at least a government regulatory perspective. So therefore, no privacy for anyone any of the time in Web 3. That is the future that I want to avoid. What I live in fear of, though, is creating middle ground solutions that then result in the ability to throw out actually full privacy altogether. And so I think that it's a really interesting question of, yes, the technology and what the technology can enable. I can tell you for sure, you know, you can do truly magical things, I think, with some of these cryptographic techniques, including zero knowledge proofs, in terms of choosing. what to obfuscate and under what circumstances and to whom and therefore again providing, I think, actually much stronger data privacy protections that are not at odds with risk reporting and other requirements. But I think that it really does come down as well to a question of positioning and a question

Starting point is 00:41:06 of presentation and a question of product choices as well. I think, I hope actually, that we might be having a a different conversation around all of this today, if Tornado Cash at the outset had had its quote-unquote compliance notes feature as a featuring functionality. For those in the audience who may not know, Tornado Cash implemented this feature called compliance notes at some point over the last year after coming under some pressure around the way that it was being used that gave users the opportunity me to opt in and generate a note that they could then use if they, you know, presumably got subpoenaed or whatever by the powers that be to demonstrate that they were not using it for illicit purposes to show kind of the paper trail of what they were using tornado cash for.

Starting point is 00:41:58 Again, that's that's a product choice that I think if they had made earlier on may have mitigated some of this because then suddenly tornado cash is not positioned as a fully anonymous mixer. it's positioned as something very different. And it may not have then become the top choice mixer for the likes of North Korea. And so I think that I know that we want to keep it kind of more in the macro context here, not to bore your listeners with the ends and outs of product decision making. But I think that it is something that is very much tied into the conversations that we're having now and demonstrates how things, you know, just these little choices can make things play out, I think, very differently over the fullness of time, both in terms of how a

Starting point is 00:42:46 neutral tool gets used and then how that neutral tool ends up being treated by the government, by users, and by observers elsewhere. What's your most optimistic scenario for how this plays out versus your most pessimistic? I think my most optimistic scenario for how this plays out is that Treasury and OFAC say, you know what? You're right. We shouldn't have sanctioned a technology. We shouldn't have sanctioned a smart contract because that sets a problematic precedent. It's no longer clear if we do that where the line gets drawn of what we're sanctioning and how that interplays with things like free speech and even constitutional, other constitutional rights, you know, First Amendment, Fourth Amendment, so on. I think that the most optimistic scenarios that they roll back from that and say, instead, we are sanctioning individual addresses that have interacted with tornado cash as aliases of North Korea and so forth. And, you know, we are also maybe, maybe going to sanction some of who we believe, even if they're anonymous, the maintainers of the tornado cash system.

Starting point is 00:44:01 And we're going to give very clear guidance to the industry about where, the line got crossed in terms of the ratio of licit versus illicit activity on the platform. I think that that is my most optimistic. And I want to emphasize something there, which is that I think the most important part of what I just said actually is the guidance and the clarity. Because as long as there's guidance and clarity, fine, we can all play within those boundaries. And we can all innovate, I think, within those boundaries. But as long as the water is murky, you're quashing a American innovation. You're driving it elsewhere. You're forcing entrepreneurs to live in fear that they're going to trip a line. And this isn't just SEC, right? You know, so often the conversation is SEC within

Starting point is 00:44:48 crypto, where, let's be honest, a lot of the ramifications of SEC action have been, you know, a slap on the wrist and a fine. We're talking OFAC, right? We're looking at 30 years in prison. that is a very different thing for an entrepreneur to be looking at. And so, you know, that I think touches upon a little bit of what my worst case scenario looks like, which is that we continue in these murky waters. We're not, you know, Miller's Freedom of Information Act request is not replied to. And we don't get any clarity on, again, where they're drawing lines or how they're making these judgments. And it really does quash innovation and also prevent.

Starting point is 00:45:32 Americans from being able to use and access tools that are used and accessible elsewhere in the world that may have, you know, really important ramifications on how we think about privacy and how we think about our own financial freedoms. I think that, again, clarity is the key here. Awesome. Well, Jill, it's always so great to have you on the show. Listeners, if you are interested in some sort of actual way more technical than we normally get primer on different privacy technologies with Jill and or others. There's tons of great people who could be a part of that as well. Let me know, because I think it could be interesting, you know, to the extent that we're actually getting deep into these conversations, having a little bit more of a kind of a basis of understanding

Starting point is 00:46:18 of what the actual options are between, you know, kind of full mixing or full privacy coins and sort of open blockchains on the other hand might be really interesting. But either way, Jill, thanks again for your time. It's always great to have you. And yeah, there's interesting times ahead. Thanks. I'm up for that conversation anytime. All right, guys, back to NLW here.

Starting point is 00:46:41 And just quickly reflecting on this conversation, it really does feel to me to be a four-part problem. The first is the principle of the thing. And this is perhaps the area where the crypto industry is farthest, although figuring out and articulating what our beliefs are, as relates to issues including privacy and decentralization is going to be incredibly important. I think in some ways it's one of those areas where it seems so obvious what the consensus views of the community are, that we might not have actually done the hard work to articulate them coherently and find out where we might disagree.

Starting point is 00:47:10 Part two, building on the foundation of ethics and principles, there is a legal battle to be fought. This feels like we're gearing up for another round of the sort of battles that were fought around PGP and encryption in the 1990s. Clearly, by sanctioning code, the U.S. government is welcoming a return to that fight. The third battle is political. This sort of encryption battle happens not only in the courtroom, but in the hallowed halls of Washington. Having leadership in the Senate and Congress who are willing to defend principles like code being speech is going to be enormously important in the years to come. Finally, the fourth battle is technological. As Jill indicated, there are an array of developing technologies that break open the current binary options of fully visible on-chain versus

Starting point is 00:47:51 is totally obfuscated through something like a mixer. It strikes me that the technological viability of options that can be at once privacy preserving and compliant could have a material impact on the nature of the legal and in particular the political challenge that faces us. As I said in the show, if that technology side is something you'd like to learn more about, let me know, as I'm currently thinking about ways to bring that into the show. For now, I want to say thanks again to Jill for always being an incredibly thoughtful and exciting person to have on the show.

Starting point is 00:48:18 Thanks to my sponsors, nexus, nexus, FtX, and NIR for supporting the show. And thanks, of course, to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - How Much Privacy and Decentralization Really Matter, Feat. Jill Gunter

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