WEBVTT - Are All Crypto Privacy Services Potentially Criminal?

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<v Speaker 1>This is Bloomberg Crypto, a daily Bloomberg I Heart podcast,

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<v Speaker 1>and I'm Stacy Marie Ishmael, Managing editor of Crypto for

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<v Speaker 1>Bloomberg News. It's Monday, September twelve. What happens if you

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<v Speaker 1>put a whole bunch of crypto transactions into a metaphorical blender,

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<v Speaker 1>and then you lock them up in a black box,

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<v Speaker 1>and then you shake that black box up, put that

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<v Speaker 1>box back in the blender, shake it up some more,

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<v Speaker 1>and then spit it out the other side. What do

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<v Speaker 1>you get? Something that feels kind of similar to the

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<v Speaker 1>experience of using a decentralized app called Tornado Cash. Tornado

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<v Speaker 1>Cash is something known as a mixer, which is a

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<v Speaker 1>service that allows people to obfuscate both the origin and

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<v Speaker 1>the output of certain kinds of crypto transactions. It helps

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<v Speaker 1>with privacy and with anonymity, But federal regulators say cyber criminals,

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<v Speaker 1>of course used services like Tornado Cash for money laundering purposes,

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<v Speaker 1>and as a result, Tornado Cash was recently hits with

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<v Speaker 1>sanctions by the US Department of Treasury. Now, privacy is

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<v Speaker 1>a key objective of many crypto proponents. It's one of

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<v Speaker 1>the things that's really important and often makes the asset

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<v Speaker 1>class attractive to certain kinds of investors. If this principle

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<v Speaker 1>can't be guaranteed, then crypto's utility for folks who care

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<v Speaker 1>about privacy becomes more questionable. Today I'm joined by Bloomberg

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<v Speaker 1>crypto blogger Emilina Cole. There's no real regulatory o of

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<v Speaker 1>a sight yet of what's happening on these exchanges, and

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<v Speaker 1>we'll discuss whether or not the centralized service can truly

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<v Speaker 1>be regulated and what the issues are surrounding crypto and privacy. So,

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<v Speaker 1>tornado Cash, this is a this centralized protocol that allows

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<v Speaker 1>transaction mixing. There's a lot of attention on it right now.

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<v Speaker 1>Let's start by explaining all three of those things. What

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<v Speaker 1>is tornado Cash, what is mixing in crypto, and why

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<v Speaker 1>are folks currently talking about it. So tornado Cash is

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<v Speaker 1>a platform that runs mostly on the ethereum blockchain. What

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<v Speaker 1>it does is it allows users to send their ethereum

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<v Speaker 1>tokens to tornado cash, and while they belong to tornado cash,

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<v Speaker 1>theory and a kind of part where it's mixing it

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<v Speaker 1>around and jumbling it up with all the other ethereum

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<v Speaker 1>tokens that have incentive Tornado and then eventually we know

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<v Speaker 1>once you take them back out again. It helps to

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<v Speaker 1>obfuscate the transaction history of those tokens. So if you

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<v Speaker 1>were somebody who's particularly concerned about financial privacy, you might

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<v Speaker 1>find Tornado Cash a really great to all for that

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<v Speaker 1>because it helps to obscure the public nature of the blockchain.

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<v Speaker 1>But if you were also somebody who might have gotten

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<v Speaker 1>those tokens through illicit means, shall we say, um, it

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<v Speaker 1>helps cover your tracks there as well. It sounds like

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<v Speaker 1>this is one of those classic situations in crypto where

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<v Speaker 1>the thing that makes it useful, interesting, attractive, especially to

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<v Speaker 1>privacy proponents, also makes it useful, interesting, attractive to people

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<v Speaker 1>who might be accused of criminal or otherwise nefurious behavior.

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<v Speaker 1>Is that kind of a reasonable assessment of the world. Yeah,

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<v Speaker 1>pretty much, and it's it's one of the reasons why

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<v Speaker 1>we're talking about it today, right. So the US imposed

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<v Speaker 1>sanctions on Tornado Cash in August, and the reason for

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<v Speaker 1>that was that some of the activity that had been

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<v Speaker 1>happening on Tornado Cash had been illicit, and they'd had

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<v Speaker 1>evidence that hackers in North Korea had been using it

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<v Speaker 1>to launder their stolen cryptocurrency in a way that was

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<v Speaker 1>made it more difficult for investigators to track them, and

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<v Speaker 1>because of that North Korean link in particular, that made

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<v Speaker 1>it not just you know, like an illegality target for

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<v Speaker 1>US authorities, but also a political one. When we generally

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<v Speaker 1>talk about the US or other government sanctioning somebody, and

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<v Speaker 1>there's been a lot of sanctions to go around since

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<v Speaker 1>Russia invaded Ukraine, it tends to be against like knowable

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<v Speaker 1>named legal entities, a person, an organization, a company. Tornado

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<v Speaker 1>Cash is a software protocol, like what in what has

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<v Speaker 1>it meant to sanction a piece of software in practice

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<v Speaker 1>and what are some of the issues that have arisen

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<v Speaker 1>as a result. So back in March, my colleague and

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<v Speaker 1>fellow reports and she interviewed the founders of Tornado Cash,

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<v Speaker 1>and at the time they said, it's not technically possible

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<v Speaker 1>to sanction a blockchain protocol like Tornado because technically it's

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<v Speaker 1>a piece of technology and being in blockchain, not one

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<v Speaker 1>person controls it. There is you know, a direct company

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<v Speaker 1>that you can say they're in charge, they're operating it,

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<v Speaker 1>they're the ones responsible for everything that happens on it.

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<v Speaker 1>It's built through open source code, which means multiple developers

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<v Speaker 1>are contributing to it, and supposedly, according to the founders,

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<v Speaker 1>community of people are the ones running it and operating it.

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<v Speaker 1>So just because a group of people built it in

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<v Speaker 1>the first place, that doesn't necessarily mean you can point

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<v Speaker 1>the finger at them and say they're the ones responsible

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<v Speaker 1>for it. Um But as things have gone on, the

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<v Speaker 1>reasons why these sanctions were able to be enforced is

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<v Speaker 1>because eventually what happened is that other providers who serviced

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<v Speaker 1>Tornado in different ways that weren't to do with the

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<v Speaker 1>blockchain's day to day operations. So you know, the email

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<v Speaker 1>addresses of people who worked on it, or the website

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<v Speaker 1>that you would visit to go to Tornado Cash, these

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<v Speaker 1>were things that were run by centralized providers US companies

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<v Speaker 1>that had rules and laws that they have to abide by,

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<v Speaker 1>and so Tornado is a sanctioned entity, they can no

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<v Speaker 1>longer do business with them. Those services went down, and

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<v Speaker 1>therefore Tornado became effectively sanctioned. Well, it wasn't only the

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<v Speaker 1>services went down, was that those providers kicked Tornado and

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<v Speaker 1>any individual founders developers that they could identify off of

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<v Speaker 1>those services. Right, So it's the way that these actions work.

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<v Speaker 1>It's not that there's like a magic button that the

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<v Speaker 1>US or other government can press and these things happen.

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<v Speaker 1>It's the organizations involved have to take active steps, and

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<v Speaker 1>they absolutely did those things. So, you know, tornado Cash.

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<v Speaker 1>You can no longer find the server for tornado cash

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<v Speaker 1>on discord, which is kind of like a chat platform.

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<v Speaker 1>You can no longer find, as you said, their code

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<v Speaker 1>hosted on services like GitHub. You can still find their

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<v Speaker 1>code hosted in other places by other people, which I

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<v Speaker 1>think speaks to what you were alluding to in terms

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<v Speaker 1>of the decentralization of the thing itself, even if its

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<v Speaker 1>services were centralized. Yeah, and it's one of the reasons why,

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<v Speaker 1>even in the immediate aftermath the sanctions, everyone was wondering, why,

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<v Speaker 1>you know, if we can't look at the code on

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<v Speaker 1>something like get hub, how will we find out who

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<v Speaker 1>might have actually been in charge of this, or whether

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<v Speaker 1>the found this could have profited from Tornado Cash and

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<v Speaker 1>therefore have some responsibility for its ongoing maintenance. But thankfully,

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<v Speaker 1>I guess for US authorities, those things were uploaded elsewhere.

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<v Speaker 1>And it's part of the narrative around crypto is that

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<v Speaker 1>if one thing is built somewhere and it's not controlled

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<v Speaker 1>by any particular ensity. What's to stop that being replicated?

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<v Speaker 1>What's to stop someone building that Tornado cash again under

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<v Speaker 1>a different name for everybody to use. Crypto loves acronyms,

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<v Speaker 1>And there's one that I encountered fairly recently, which is

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<v Speaker 1>dino or d I n O, which is decentralized in

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<v Speaker 1>name only, which is kind of an increasing criticism of

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<v Speaker 1>so much of the fundamental infrastructure of crypto. You know,

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<v Speaker 1>it's applied to everything from the folks who are like

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<v Speaker 1>Web three is great, and then you you know, poke

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<v Speaker 1>a little bit harder, and it's just a bunch of

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<v Speaker 1>Web two companies that have like Web three skins. It's

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<v Speaker 1>things like Tornado cash, where even if as we've said,

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<v Speaker 1>this protocol could be hosted in lots of other places

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<v Speaker 1>that really relied on a centralized infrastructure for every from

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<v Speaker 1>its email hosting two, it's actually called repository. What are

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<v Speaker 1>the alternatives here? Right? If if you are a person

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<v Speaker 1>who is serious about maintaining your privacy, having some degree

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<v Speaker 1>of freedom from government interference or resistance to censorship, what

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<v Speaker 1>does the presence and the future potentially look like for you?

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<v Speaker 1>So Tornado wasn't the only crypto mixing tool out there,

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<v Speaker 1>and there are others um So, so that's like an

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<v Speaker 1>immediate one. But if we're thinking about ways that you

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<v Speaker 1>can kind of step further away from the centralization and

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<v Speaker 1>step further towards something that possibly couldn't be sanctioned or

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<v Speaker 1>would have more difficulty in it anyway and being taken down,

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<v Speaker 1>the first thing is privacy coins. So there are cryptocurrencies

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<v Speaker 1>like z cash, if you'll excuse my British accment with

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<v Speaker 1>the zed um and minero um, which are slightly different

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<v Speaker 1>to other tokens, and that they helped to obscure that

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<v Speaker 1>pathway a little bit more. The only thing is with

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<v Speaker 1>those cryptocurrencies is that are not widely accepted. You're not

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<v Speaker 1>going to be able to do as much with a

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<v Speaker 1>token night minero or zaid cash as you would be

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<v Speaker 1>with an ether token, so you're a little bit more

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<v Speaker 1>limited in that way. Coming up more from my conversations

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<v Speaker 1>with Emily Nicole about how the wider crypto community has

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<v Speaker 1>responded to the sanctions against tornado Cash, one follow up

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<v Speaker 1>question for you, Emily is, and I'm just going to

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<v Speaker 1>say this thing that I say all the time, which is,

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<v Speaker 1>you know, everything old is new and crypto and one

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<v Speaker 1>of the oldest tensions is this tension between this idea

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<v Speaker 1>of if you want perfect privacy protections, you have to

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<v Speaker 1>allow a certain amount of criminality right where it's like,

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<v Speaker 1>if something is really good at protecting your privacy, then

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<v Speaker 1>it's definitely going to be used by criminals. That is,

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<v Speaker 1>you could argue a dramatic oversimplification, but in a lot

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<v Speaker 1>of ways, that's also the conversation that folks are having

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<v Speaker 1>in crypto right now. Where are people landing on either

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<v Speaker 1>side of this question? If you think about what the

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<v Speaker 1>broader financial world looks like, there's an element of criminality

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<v Speaker 1>and all of it, right, so be naive to think

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<v Speaker 1>that you could feasibly remove criminality from every aspect of it.

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<v Speaker 1>But what concerns people the most is that there's no

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<v Speaker 1>real regulatory oversight yet of what's happening on these exchanges

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<v Speaker 1>or on these platforms, particularly ones like Tornado Cash, which

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<v Speaker 1>don't really have like you know, a jurisdiction or a

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<v Speaker 1>company office that you can point to and a CEO

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<v Speaker 1>that you can bring in front of the Senate. And

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<v Speaker 1>so that's one of the concerns is that like, if

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<v Speaker 1>you can't have any oversight at all or have anybody

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<v Speaker 1>that you can point to as responsible with figure than

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<v Speaker 1>than what roots are left to you in order to

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<v Speaker 1>be able to shut those things down. Right, So this

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<v Speaker 1>is essentially the argument that in order to have privacy,

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<v Speaker 1>you actually need some amount of centralization, Like somebody has

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<v Speaker 1>got to take one for the team and you know,

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<v Speaker 1>be the entity that could get in trouble if you know,

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<v Speaker 1>bad things are happening and regulators or other enforcement agencies

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<v Speaker 1>are trying to crack down on those bad things. Yeah,

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<v Speaker 1>I think we're seeing it more and more now that

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<v Speaker 1>crypto people who have espoused the benefits of decentralization to

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<v Speaker 1>like the nth degree and now starting to say things like, oh, well,

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<v Speaker 1>you know, we'll never be able to have full decentralization.

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<v Speaker 1>We have to aim for the best amount that we

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<v Speaker 1>can possibly get because we're never going to be able

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<v Speaker 1>to do the actual full thing. And you'll even see

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<v Speaker 1>CEOs of major crypto exchanges say this now, whereas you know,

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<v Speaker 1>maybe a few years ago you might have seen the

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<v Speaker 1>full like Bitcoin rally wammy of centralization is dead and

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<v Speaker 1>everything is is defy in future, and so as that

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<v Speaker 1>kind of narrative changes and people have to start thinking

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<v Speaker 1>about this differently, it will be interesting to see what

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<v Speaker 1>tools the crypto enruy tries to come up with to

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<v Speaker 1>get around these centralization risks. In the aftermath of the

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<v Speaker 1>Tornydo cash sanction and the subsequent arrest of this developer

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<v Speaker 1>outside of the United States, a lot of the conversation

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<v Speaker 1>took on kind of a very you know, first they

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<v Speaker 1>came for Tornydo cash kind of till own. And there's

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<v Speaker 1>this real kind of contrast between the well, I guess

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<v Speaker 1>we've got we have to give up some freedoms to

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<v Speaker 1>have some freedom's conversation and the folks who are you know,

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<v Speaker 1>kind of fighting the fight that any slope is too slippery, right,

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<v Speaker 1>that you have to have this really aggressive, assertive, fundamental

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<v Speaker 1>approach to defending against this. What recourse do those folks

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<v Speaker 1>really have if they're attempting to kind of go up

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<v Speaker 1>against governments, Whether or not it's possible for you, no

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<v Speaker 1>crypto person to see something like the Department of Justice

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<v Speaker 1>if they felt like they're being treated unfairly, I mean,

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<v Speaker 1>you know better than I If there have been any

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<v Speaker 1>successful examples of that, and I've bet there are a few,

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<v Speaker 1>but there is definitely a thinking at least among the

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<v Speaker 1>crypto cognizanti that anything is possible. That's the dream of bitcoin,

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<v Speaker 1>right The dream of crypto is that you can do

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<v Speaker 1>anything if you put your mind to it, and that

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<v Speaker 1>includes evading total government sanction or oversight. And if you

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<v Speaker 1>live in the web long enough that maybe there'll be

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<v Speaker 1>a way that your hoping could become completely out of

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<v Speaker 1>sight and out of mind if the government were to

0:13:06.440 --> 0:13:11.240
<v Speaker 1>come knocking. They're always going to be people who are

0:13:11.280 --> 0:13:18.400
<v Speaker 1>trying to outrun the attempts of people in positions of power, governments,

0:13:18.520 --> 0:13:23.400
<v Speaker 1>state actors, non state actors, and then those governments, state actors,

0:13:23.400 --> 0:13:26.320
<v Speaker 1>non state actors are going to be throwing often billions

0:13:26.360 --> 0:13:28.640
<v Speaker 1>of dollars of the problem of keeping up with the

0:13:28.640 --> 0:13:31.720
<v Speaker 1>people who are trying to outrun them, and there's definitely

0:13:31.800 --> 0:13:35.120
<v Speaker 1>a feeling that that is starting to emerge in crypto

0:13:35.240 --> 0:13:38.960
<v Speaker 1>right now. The challenges the sums involved on the part

0:13:39.120 --> 0:13:41.440
<v Speaker 1>of you know, the folks in crypto who really care

0:13:41.440 --> 0:13:44.559
<v Speaker 1>about these are like they have way fewer resources than

0:13:44.600 --> 0:13:48.920
<v Speaker 1>the governments who are equally keen to crack down. But

0:13:49.040 --> 0:13:52.400
<v Speaker 1>then the governments themselves are also slightly on the back foot, right.

0:13:52.440 --> 0:13:55.960
<v Speaker 1>It's always a you regulate out of existence rather than

0:13:56.000 --> 0:13:59.320
<v Speaker 1>into existence, is one of the former UK regulators likes

0:13:59.360 --> 0:14:01.160
<v Speaker 1>to tell me every time I ask him about crypto.

0:14:01.600 --> 0:14:03.880
<v Speaker 1>Um so, what they'll be thinking is like, you know,

0:14:04.000 --> 0:14:06.920
<v Speaker 1>how can we regulate the bad stuff out of crypto

0:14:07.080 --> 0:14:09.040
<v Speaker 1>rather than how can we regulate the good stuff in?

0:14:09.720 --> 0:14:12.240
<v Speaker 1>Got it? Well, Emily, thank you as always for being

0:14:12.240 --> 0:14:18.720
<v Speaker 1>on the show. You can find more of Emily's reporting

0:14:18.720 --> 0:14:21.880
<v Speaker 1>on the Bloomberg terminal on Bloomberg dot com or follow

0:14:21.920 --> 0:14:26.280
<v Speaker 1>her on Twitter. She's at Emily J. Nicole. That's E

0:14:26.560 --> 0:14:30.440
<v Speaker 1>M I L Y G N I C O L

0:14:31.040 --> 0:14:36.320
<v Speaker 1>L E. On the next episode of Bloomberg Crypto, El

0:14:36.360 --> 0:14:40.200
<v Speaker 1>Salvador is a year into its great Bitcoin experiment. On

0:14:40.240 --> 0:14:44.240
<v Speaker 1>September seven, it became the first country in the world

0:14:44.320 --> 0:14:48.320
<v Speaker 1>to accept the token as legal tender. What's happened since, Well,

0:14:48.720 --> 0:14:54.880
<v Speaker 1>it's been a ride. This is Bloomberg Crypto, a daily

0:14:54.920 --> 0:14:58.320
<v Speaker 1>podcast from Bloomberg and I Heart Radio. For more shows

0:14:58.320 --> 0:15:00.680
<v Speaker 1>from I heart Radio, visit the i heart Radio app,

0:15:00.920 --> 0:15:05.040
<v Speaker 1>Apple Podcasts, or wherever you get your podcasts. Send us

0:15:05.040 --> 0:15:07.920
<v Speaker 1>your comments, questions or suggestions for the show to Crypto

0:15:08.000 --> 0:15:11.120
<v Speaker 1>at Bloomberg dot net or find us on Twitter. We're

0:15:11.160 --> 0:15:17.360
<v Speaker 1>at Crypto. The supervising producer of Bloomberg Crypto is Vicky Verglina.

0:15:17.760 --> 0:15:21.320
<v Speaker 1>Our senior producer is Janet Babin. Our producers are Mohammed

0:15:21.320 --> 0:15:25.400
<v Speaker 1>Farup and Sharon Barrio. Hilda Garcia is our engineer. Original

0:15:25.480 --> 0:15:29.320
<v Speaker 1>music by Leo Sidrn. I'm Stacy, Marie Ishmael. We'll be

0:15:29.360 --> 0:16:00.320
<v Speaker 1>back tomorrow. D