What Tornado Cash makes clear

I’ve been in the financial services sector since around 2008, and at some point I was directly involved in the technology used as part of a banks regulatory reporting requirements.

The amount of efforts needed in a bank to perform KYCs, AMLs, and trade reporting in general is immense. We might all like to hate on banks for their shitty service, lack of clarity and outdated technology, and while that’s fair criticism, they have at least a little bit of an excuse given the regulatory requirements put on them.

Seeing then what happened to Tornado Cash didn’t come as a big surprise. As someone who works in the blockchain space, I see how much better that technology is to the old banking rails, but I also know it can’t operate in a vacuum for too long.

But, irrespective of that, what’s very obvious is that we’ve become lazy, and given in to the usual trend towards centralization. Just like most of us don’t host our own WordPress blogs, but instead rely on Medium and the likes, we’re all using centralized smart contracts. Just like the Internet is a decentralized network, so are blockchains. But we’re again not using this to its true potential.

The reasons are the same as always. Humans are lazy, and we want the easy way out. So we don’t question what we do enough.

And what’s the issue this time? It’s not that TC got censored through a centralized stablecoin, that was inevitable. No, the issue this time is that we were happy to give up privacy. All transactions on a blockchain are in the open, which is why regulators and governments are fine with it, because they can see it all anyway. The amount of reporting provided by blockchains are far better than what the banks ever provided. 100% clarity of where funds go. That’s fantastic, for the regulators. TC, of course, broke that link, but it was easy to censor it because it was a centralized location. So now it’s closed down.

And now a bunch of people are afraid about governments censoring transactions on Ethereum because they might go after the people running validators. I don’t think we should be surprised about various validators in different regions of the world operating under different local regulation in the future. But again, it’s not about that.

We need to get to a point where the data publicly visible on the public blockchain network is nothing more than checkpoints. I’ve blogged about this elsewhere, where I argue for a layer 3 that offer true data privacy by not sharing that data. Using the soon to be available zkEVM tech, we can all do this with validiums and the like.

Keeping my data private, only stored on devices and hardware of my choice, is the only logical approach here. Only then do we have something that’s decentralized. I believe what was done to TC will help motivate this in the next wave of blockchain tech.