The Wolf Of All Streets - Tornado Cash: The Piece Of Code That Sparked A Worldwide Battle For Privacy And Freedom Of Speech

Episode Date: August 16, 2022

The biggest crypto story of the last week was the US Department of Treasury’s decision to sanction cryptocurrency mixer Tornado Cash. Why did it happen? What does it mean for freedom of speech? What are the implications to ordinary Americans who were using Tornado Cash? What does it have to do with Putin and North Korea? I discussed all of this and more with subject matter experts: Michael Fasanello, a compliance officer, and Seth Hertlein, global head of policy at Ledger. Read Seth’s Twitter thread on Tornado Cash: https://mobile.twitter.com/SethHertlein/status/1557442355678117889 JOIN THE FREE WOLF DEN NEWSLETTER https://www.getrevue.co/profile/TheWolfDen THANK YOU TO OUR SPONSOR ►► Have you ever had your exchange go completely offline during days of high volatility? Of course you have. We've all been through it. Those days are no longer with Bullish. Bullish is a new breed of digital asset exchange that empowers users to trade with deep and predictable liquidity across highly variable market conditions. They also have incredible automated market-making and industry-leading security. I can't get enough of this platform and it's fully regulated. Sign up here https://thewolfofallstreets.info/bullish/youtube Bullish is licensed by the Gibraltar Financial Services Commission. Virtual assets and related products are high risk. Consult your investment advisor and trade responsibly. Bullish is available in select locations only and not to U.S persons. Visit bullish.com/legal for important information and risk warnings. Timestamps: 1:32 Tornado Cash story 2:10 Sea turtle attack 2:55 Meet the guests: Seth Hertlein & Michael Fasanello 3:30 Sanctioning a piece of code 6:20 Illicit transactions with Tornado Cash 8:05 Cash should be banned! 10:20 Tornado Cash developer arrested 12:20 Multi billion fines for violating OFAC 13:10 Violation of free speech 15:50 The timing of Tornado Cash sanctions 20:45 Putin and North Korea 22:10 The role of politics in Tornado case 23:40 The consequences of the sanctions Follow Scott Melker: Twitter: https://twitter.com/scottmelker Facebook: https://www.facebook.com/wolfofallstreets Web: https://www.thewolfofallstreets.io Spotify: https://spoti.fi/30N5FDe Apple podcast: https://apple.co/3FASB2c

This episode is sponsored by my good friends at Bullish. Stay tuned for more information on this amazing company later in the episode. Breaking news, everyone. The United States government is banning airplanes because a criminal wants to use one to fly from one country to another. United States government is also banning iPhones because a criminal once made a phone call to his mom and mentioned some criminal intent.

Well, that's basically what we have happening now with Tornado Cash, although those things are obviously not the case. The first time that I, our guests can tell me if I'm wrong, but the first time that I can recall in history, the Treasury Department is sanctioning effectively a piece of open source code rather than a person or an entity, which effectively makes it illegal for any United States citizen to interact with that with a potential penalty of 30 years in prison. And we're going to talk about why this is a dangerous precedent and, of course, a massively slippery slope for freedom and privacy moving forward. You guys know I've been gone for quite a while. I kind of missed the story and

didn't do a very deep dive until this weekend. So luckily, I've got Seth Hartline-Ledger here and Michael Fassanello to discuss this with us. You guys don't want to miss this one. Let's go. What is up, everybody? I'm Scott Melker, also known as the Wolf of Wall Street. Before we get started, please subscribe to the channel and, I don't know, cry tears on the like button about the privacies that are being violated all over the world. Because it's happening, and this story is absolutely absurd as I've caught up on it. Of course, we all know that there was a coder arrested in the Netherlands.

As usual these days, considering everything I read seems to be fake news or made up, I'm reserving judgment on that actual situation until we see if he's simply being arrested for programming the code or if there's something else deeper there. but i have a feeling it's probably the former and that this is once again a terrifying disgusting story as you guys know i have been away basically two weeks the last time i live streamed was uh tuesday two weeks ago i ended up going on vacation in the bahamas and taking a savage attack from a sea turtle which you you guys may have seen on Twitter. I'm very lucky to be alive, to be quite honest with you. I was a very angry sea turtle. I got bit by a sea turtle. It was hilarious. Probably one of the funniest things

ever happened to me. I think now I'm a unicorn. I got bit on the foot by a shark about 10 years ago surfing in South Beach. I was the first person to be bit by a shark on South Beach in like 35 years. And now I've been savagely attacked by a sea turtle. So needless to say, I am not beloved by sea life, but we can get into that later. So guys, as you know, I have two guests today, Seth and Mike. I'm going to go ahead and bring them both on right now so that we can talk more about this tornado cash situation because it's really, really terrifying. Seth, you wrote an amazing thread about it. You kind of made some of the comparisons similar to what I said at the very beginning. I mean, is this equally absurd as banning all

these other platforms or technologies because they've been used by criminals? Yeah, I mean, I think it's a, you know think it's an important conversation to have. Sanctions as a tool used by the Treasury Department in the U.S. has historically always been aimed at individuals, humans. And in fact, what they actually did last week was to add the Tornado Cash URL, tornado.cash, and 38 ETH addresses, including the smart contracts that run Tornado Cash, to a particular list, the SDN list, or specially designated nationals and other blocked persons, right? And so that's a list of people, right? Nationals are people and other blocked persons. Now that can include entities, but never before has that, you know, has that list of persons included, you know,

inanimate objects or, you know, or code. Now, a lot of people point out that, you know, that crypto addresses have been added to the SDN list in the past, and that's true. But I think that's better thought of as sanctioning a person, right? Because a person- It's like their bank account. I mean, that's like taking the bank accounts of an individual, right? Exactly. A person owns or controls that wallet.

The distinction here is that the Tornado Cash smart contract itself was added to the list, meaning that Americans can no longer legally interact with it. And, you know, that's a bit of a Rubicon, right? We've not dealt with that before. And I think it, you know, calls into question a number of those examples, you know, that I listed in my thread, and that you pointed out at the top of the stream. If we're going to start sanctioning non-persons, where does it end? Can we sanction objects now? What other types of information? Does anything a criminal or someone viewed as a threat by the U.S. government, whatever they touch can be sanctioned now? There are some pretty profound implications for that that I think we're just starting to sort through.

Yeah, it's absolutely terrifying. And then it raises, I think, endless questions about what that means for people who have interacted with that smart contract in the past. Obviously, right. For legitimate reasons, I think it's very clear. We should point out that probably the bulk of the activity by a large majority there is just people trying to protect their privacy and not doing anything illicit. Right. So what does it mean for people who have interacted with it in the past? Also, we've seen that there are people literally targeting, I mean, I know Justin Sun reported this,

are just sending a little bit of ETH to people they don't like's wallets through Tornado Cash to get them sanctioned and get their wallets locked. I mean, this is horrible. Mike, what do you think? Yeah, it's a very, very serious issue, but I have to say it actually, it gave me a chuckle to see people, celebrities, people well-known in crypto, Brian Armstrong, Jimmy Fallon, all these people getting basically dropped dirty ETH as basically a show of force from the community saying, listen, Treasury, you can sanction a thing know, it's not really getting to the target that you're trying to reach here. I've seen different numbers as far as,

you know, how much, you know, illicit activity actually goes through tornado cash. I've seen 14%. I've seen 37%. I've seen a bunch of different statistics. None of them seem to seem to propose a majority of the transactions being illicit. At the same time, you know, from the legal and regulatory standpoint, I work with OFAC in the past. I'm a student of the transactions being illicit. At the same time, you know, from the legal and regulatory standpoint, I worked with OFAC in the past. I'm a student of the law myself. And so, you know, under EO Executive Order 13694, I mean, the president has given OFAC the capacity to come down with sanctions like this. I think, you know, as Seth was saying, what makes this starkly different from the past is all of those other types of sanctions that had been handed down or designated,

if you would, they involved, you know, parties that had some sort of agency, whether it's an individual, an entity, a government, you know, even country programs. I mean, OFAC has country programs, Russia, Cuba, Iran, things like that. This one falls under cyber. And so it's targeted, specifically focused at nefarious activity in cyberspace. The question here is, is it really getting to the heart of what they're trying to accomplish or is it really overreaching into the realm of privacy? One can argue that if you're going to do this type of sanctions, if you're going to shoot a shot across the bow with crypto like this for this type of activity, ban cash.

Because a hell of a lot more illicit activity happens and has happened for hundreds of years involving currencies, fiat currencies. So why aren't we acting in the fiat space more strongly versus here? I mean, you see banks like HSBC, Wells Fargo. I mean, they get fines, millions of dollars, slaps on the wrist in terms of what they're actually passing through their institutions. But then the government comes down basically with a sledgehammer on a fly in terms of, you know, crushing open source code, you know, and going after. I mean, in the case of the Netherlands,

I mean, I think what scares me here is if you're going to criticize the US, at least give us something, the US government, at least give the government something here, which is they haven't gone so far as to arrest people. Okay, the Netherlands, that's absurd that you would go out and arrest basically a code developer

merely for writing a code that could potentially be used for nefarious activity, not specifically designed to facilitate nefarious activity, but that could be used in that sense. And like you joked at the beginning, Scott, you know, we should should we ban cars? Should we ban cell phones? I mean, where does it end? And so I think, you know, as much as the U.S. can be criticized for actions like this at the same time, we do have to sit here and say, well, at least at this point in time, we do have a better situation than Europe. We do have a better situation than Asia. This is not China. This is not Russia. You know, so there is that. But I am, you know, curious to see just how aggressive the government gets from this point, because this is a very different step than what we've seen in the past couple of years. I had spoken a lot on different forums in the past about regulatory fence sitting. Legislators don't seem to want to act. The regulators are basically regulating by enforcement.

We've seen that with the SEC. But this is a different step entirely. And now they're starting to get serious. It's hard to be encouraged by being, I guess, like the prettiest pig in the pen if you're still going to get slaughtered. Right. So that's again, that's just another slippery slope. They're not arresting people yet. And I guess that leads to what this actually means for enforcement, because it seems like this is more of a symbolic gesture to sort of, as you said, I think, shoot a shot across the bow, then they're not going to be able to go arrest every single person who's had a tornado cash transaction of any sort, right?

And you alluded, obviously, I have this story here, the Netherlands arrest a suspected developer. Maybe you guys can give me some color on this, Seth. Is it literally just because he programmed this or are there other allegations here? Yeah, you know, I think, you know, nobody knows quite yet. You know, not a lot of information has come out from, you know, from Dutch authorities other than, you know, so we don't know. And, you know, as you alluded at the top of the hour, you know, if this developer was truly just arrested for writing some code, you know, I think everyone should be very, very concerned. You know, I reserve judgment because I don't know the full story. I don't know if there's something more to it that could explain it, but it's something that the crypto community needs to be watching very closely. If that is, in fact, what is happening here, it's hard to imagine a clearer example of restraint on free speech or a sort of a government chilling effect than, you know, to take an action like this.

But going back to a point Mike made before about this being, you know, symbolic, I think there's a statistic that I think paints a pretty good picture here. The estimate is that approximately $7.6 billion U.S. dollars worth of ETH has gone through Tornado Cash in its entirety. And just to put that into perspective, a large French bank, BNP Paribas, in 2014 was fined $8.9 billion in 2014 for sanctions violations. So there are banks that have had larger fines for sanctions evasion than all of the money that has ever gone through tornado capture. Right, so I don't think this was really about sanctions evasion on a large scale.

I think this was much more a policy and a political calculation that there's another little interesting tidbit that we can get into later on the political motivations here. But I think it's important to start just by putting the dollar values into perspective of Tornado Cash versus the banking system. I mean, don't we actually have precedent that code is speech and we have free speech, obviously, and that money is speech and we have free speech, obviously. So this could very easily be argued as a violation of the First Amendment. I mean, those are that that's been litigated. Right. I mean, we've seen judgments on those things. Yeah, absolutely. So the sort of the leading case on CODA's speech is Bernstein versus Department of Justice, which involved a Berkeley grad student who had developed a new encryption technique encryption technology to be military technology and prohibited its publication and export. And so some groups, including the EFF, the Electronic Frontier Foundation, supported Bernstein in mounting a First Amendment challenge to, you know, to that prohibition.

And it got up to the Ninth Circuit Court of Appeals, which found that code is speech and that the export restrictions were unconstitutional. Basically, the government wanted Bernstein to get licensed as an arms dealer for writing code, which was pretty stupid. But that, you know, that case is the reason that, you know, encryption technology is widely available to the public today and your messaging app or, you know, you know, all over the place. You know, your video, you know, video conferencing apps use encryption in the background, lots of things. The reason that that's legal is because of the Bernstein decision.

And then there was another important series of cases where the Motion Picture Association tried to block, actually, I think he was Dutch, a developer who sort of reversed engineered the scrambling technology on DVDs and posted it on the website. This was a series called the DCSS Cases.

And they tried to prevent him from publishing that. And there was a freedom of speech challenge and supporters ended up taking the source code and publishing it on t-shirts and selling t-shirts. And it made it very apparent that, you know, that the actual source code on a t-shirt was speech and expression. And so that case actually made it to the Supreme Court of California, which also recognized that code is speech. Everybody knows that there are advantages to trading on both centralized and decentralized exchanges,

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happening now? Is this just a symptom of this general ramp up against the crypto industry? Or is there something deeper here? I think that there's largely been a lot of criticism against the government for basically not giving any rails to the industry, at least for the centralized part of the industry to decentralize their arguably can't be rails or they wouldn't be effective. With the centralized piece, you know, exchanges, you know, currency transmitters, they've been begging for clarity from the SEC, from FinCEN, from Treasury, give us some regulations to follow and we'll follow them. It's not an industry saying, you know, we're out here to create anarchy.

I mean, the centralized portions of this, they want to do the best they can, but they're just not being given enough help. I would say if Treasury thinks that this is helping, they're going about it the wrong way. You know, from a First Amendment context, I mean, any government restriction on speech, it has to fall within narrowly tailored parameters, it has to be, you know, furthering a substantial government interest,

and it has to have a basically a least restrictive means test. You know, in this situation, I think I think part of that test is met, but the other pieces aren't least restrictive means, I think there's other ways to go about going and trying to prevent North Korea or any other state actors from doing what they do. You know, if you want to prevent money laundering, we're doing that in a hell of a lot of different ways than coming down on code. You know, when you look and you see the small piece of this contract that's being used to launder money, I mean, you know, it does have a very legitimate use that I think has a strong argument in court. And I'd like to see this argument made.

So I can't wait to see who actually brings it to court. You know, but insofar as going after, you know, bad actors by, I mean, realize people can still use tornado cash. U.S. persons can't use tornado cash. But, you know, outside U.S. jurisdiction, this designation means nothing. use Tornado Cash. US persons can't use Tornado Cash, but outside US jurisdiction, this designation means nothing. So foreign actors, they're still going to use Tornado Cash.

So I don't really understand what the targeting basis here was other than to show US persons, oh, we are serious about crypto and we can control you when yours happens. So there's that, but I think that for sure know, for sure, you know, going after this to target North Korea,

the Lazarus Group, it's not effective. And so when you use a sledgehammer to smash a flight, you know, that's when people have to really wonder what the hell is going on. And I agree with Seth that there's definitely something, there's another message being sent here. And I think that is the government is tired of being perceived as, you know,

unable to control U S persons in this industry and in this community. And Seth, you mentioned that there is political motivation you think, so I'd love to hear that. Yeah. So I, you know, I think the timing to me is,

I think a pretty strong giveaway. So on, well, you have to know a little bit of context about tornado cash. So Mike said earlier in the conversation that, you know, some amount of the east that's gone through tornado cash has been from, you know, sort of, you know, foreign, foreign state actors. No, nobody knows exactly the number but we know it's not zero, you know, but you know, 15%, 30%, whatever it is. You know, most of that is, you know, we know is associated with North Korea and, and particularly the Lazarus group, which is,

which is the DPRK sort of cyber warfare unit. You know, and particularly the Lazarus Group, which is the DPRK's sort of cyber warfare unit. You know, and these are bad guys, right? And these guys are bad for the crypto community. They have been responsible for most of the major bridge hacks. And, you know, they are stealing from us. They are stealing from sort of Western, you know, crypto users, right? So, you know So no sympathy there. But think about the timing. On August 7th, Kim Jong-un offered 100,000 North Korean troops to Vladimir Putin to assist in his war in Ukraine. August 8th, the next day, tornado cash sanctions come up. Coincidence? I don't think so. Right. So I think this was a situation of, you know, it was known that Lazarus had been using tornado cash and the administration in the U.S. needed a response to Kim Jong-un offering troops to Vladimir Putin. I think it's

as simple as that. Right. It's no secret that, you know, Tornado Cash was out there and operating and being used and that some percentage, certainly not a majority, but some percentage was being used for illegal means. Why was it sanctioned on this particular day? I think that's the answer. I'd actually not heard that argument and it's hard not to see those, or hard to see those as perfect coincidence i mean what's this open source code what's to prevent lazarus from creating their own tornado cache and continuing to create their own tornado caches as their uh as their i guess shut down and pursued like you said mike i mean this is the united states it's

the u.s treasury department but it's not everywhere. So does this really solve anything? I actually agree with Seth. It probably is the political motivation. And it's almost pitiful because what other action could the U.S. take in that situation? I mean, they've already sanctioned North Korea. They've already sanctioned Lazarus Group. They've already sanctioned a bunch of other entities associated with both. And so, you know, how do you basically hurt, you know, an adversary that you keep

punching and punching and punching and it still keeps coming? So that's the sad part of this. And worse than that is that they've used a tool, you know, that has strong implications for privacy and First Amendment speech and, you know, a lot of good in this industry. They've leveraged that as the only means of retaliation, you know, towards that situation with the hackers and everything. So it is a sad day for the industry. You know, there's no reason why people shouldn't be able to have a certain level of privacy in this industry and in this community of cryptoverse. I mean, it's just absurd for the government regulators and even law enforcement to think that they should be able to have carte blanche to see what everybody is doing, when they're doing it, who they're doing it with. That doesn't happen with cash. That's why a lot of people still use cash. And that's going to be one of the reasons why,

you know, for the get on zero crew, you know, which I'm all behind that. I love crypto. At the same time, it's going to be real hard to wrestle that, you know, from the cold dead hands of people that realize it may be the only safe harbor for privacy that we have left.

Yeah. Cash is going to be eliminated as well, right? That's just a matter of time. I think we're already seeing a number of countries that are limiting the size of transactions with cash, most notably Israel. Of late, you can only transact a few thousand dollars. I mean, this is not a conversation we're going to have right now, but obviously this is another argument or something to watch as central bank digital currencies probably become a bigger reality. But maybe I can have the two of you back on to discuss that again in the future. But just to close this, I know that both of you have to go. Michael, you said that you'd be interested in seeing how this will eventually be litigated.

Both of you sort of alluded to that. What recourse do people have and who are those people, right? The code can't fight back. So is this on the American people as a whole to fight this or some sort of class action suit? How will this be litigated and how can this be theoretically, I don't think it will be, but reversed if people are angry enough about the president? I think you're going to see groups like the Blockchain Association and other industry advocacy groups will throw all of their support behind the individuals and the community. There's going to be people that, you know, to bring a case, you have to have standing. And so to have standing, you have to have some sort of harm. So it will be people that, you know, have funds blocked, you know,

the US dollar coin blocked like $75,000 worth of coin that was locked up in Tornado Cash. People that can't get their coin now are going to, you know, have some sort of legal recourse. You know, anybody, you know, even with GitHub, I mean, you know, arguably, not only could GitHub probably be the target of a suit, but then, you know, further than that, the U.S. government as putting down these sanctions, which GitHub had to comply with to remain, you know, legally operational, GitHub users could potentially have some civil suits here. So it is really going to be interesting to see, you know, who saddles up and who they're charging after. Seth? Yeah, I think that's right. I think it'll be, you know settles up and, uh, and, uh, who they're charging after. Seth.

Yeah, I think, I think that's right. I think it'll be the, you know, civil society groups, um, you know, it could be groups like coin center or electronic frontier foundation, um, that have been, you know, sort of champions of online privacy and freedom for a long time. Um, you know, I think standing is not too much of a problem. Um, you know, probably anyone that got dusted with, uh, you the point one tornado cash is probably has standing to some extent. So, you know, I don't I don't think that's that's a big problem. You know, I think the bigger problem in my mind is that, you know, that process takes years and these sanctions can remain in place.

I mean, the damage is really already done, right? The damage is almost instantaneous. And to unwind that will take a lot of time and a lot of money and a lot of effort. And, you know, I think the bigger questions are, you know, sort of what happens, you know, what happens now. There was a big controversy, you know, on crypto Twitter over the weekend about sort of, you know, DeFi apps, you know, blocking wallets that got dusted and, you know, and sort of how decentralized are they really, if that's, you know, if that's the response. You've got, you know, the big sort of infrastructure providers, the relayers like Infura doing the same thing and, you know, preventing people from accessing and using Ethereum if they've ever had, you know, interactions with Tornado Cash, you know, and it led some people

to speculate, you know, like, what's, you know, what's the future for ETH, for Ethereum? You know, they're, you know, they're going to be some sort of, you know, a US compliant fork, and then a sort of an everywhere else fork of Ethereum. You know, I think that that might be a bit alarmist, but, you know, it's worth thinking about. You know, there are going to be real and lasting implications here that happened long before, you know, the sort of First Amendment rights are vindicated in litigation. Yeah, well, it's going to be interesting to watch and I'm counting on you guys to come back

and help me keep tracking this and other things in the future. Thank you so much, both of you, for joining. I just want to make sure I got your... Everybody go follow the two of them. Seth Hertline, S-E-T-H-E-R-T-L-E-I-N. Is that correct? On Twitter.

And you can find Mike at Blockchain Mike, but the first O cleverly is a zero, right? You got that right? Okay. I'm not going to spell that one out with the zeros and the numbers, but you guys get the idea. Thank you guys both for doing this.

It was awesome to have both of you, especially since I'm so far behind and you guys actually know what the hell is going on here. So thank you once again, and I'll see you both soon. Thanks, man. Yeah, thank you so much.