Introduction

If you are into cryptocurrency in the US, you may be familiar with agencies like the OFAC (Office of Foreign Assets Control) and the SEC (U.S. Securities and Exchange Commission) trying to sink their greedy fingers into the cryptocurrency market, getting every dollar they can, regulating, while attempting to shut it down at the same time. Decentralized virtual currency directly threatens the very foundation of the historically unstable and unbacked fiat system.

The question was always WHEN rather than WILL in terms of the US taking steps to regulate the crypto market. Events like the UST/Luna crash, the Bitconnect Ponzi scheme, and the popularity boom of Tornado Cash are fantastic for US regulators, pushing along harsh sanctions and regulations. It gives them and the media a platform to label the entirety of cryptocurrency with any number of unimaginably foul descriptors.

While OFAC attempts to shut down privacy services like Tornado Cash, the SEC imposes intentionally vague regulation regarding the identifiers of cryptocurrency securities and DAOs (Decentralized Autonomous Organizations) that are causing builders to err on the side of caution to prevent the SEC cracking down on them. This type of vagueness of law both gives the SEC power to repress systems more subjectively, and essentially terrorizes protocols into submission - making assets less sought-after due to the danger of them losing value as a result of becoming more regulated.

Terrorism Disguised as Protection

The OFAC

On August 8, 2022, OFAC sanctioned Tornado Cash (along with other similar services), the largest cryptocurrency tumbler on Ethereum, in order to prevent money laundering from crypto-related hacks and vulnerabilities. Because the contracts are essentially just code, this is unarguably a disregard and straight forward violation of our constitutional freedom of speech with no repercussions.

Besides banning the service altogether, there are a plethora of (*cough cough*) constitutional methods that they could have used to stop the money laundering. The Tornado Cash network is made up of a lot of different aspects like relayers and liquidity providers for the native token, TORN, providing the relayers with an incentive to help transfer funds around. Perhaps the OFAC could have investigated these liquidity providers and relayers - penalizing only those who committed the criminal offense of money laundering.

This sanction and other address-specific sanctions have caused a staggering +50% of blocks produced to be OFAC-complient; In other words, censored. You can view the live stats on mevboost.org.

In practice though, 50% of blocks being censored only causes transactions interacting with these sanctioned addresses/contracts to wait an additional 2-3 blocks on average before being added. Inconvenient yes, but not the end of the network. Ethereum users in the US can still enjoy the anonymity of tornado cash by directly interacting with the contract.

The censorship is enforced by MEV-Boost relays, where validators use the service to outsource their block-building for additional profits. These services purposefully do not include certain transactions into the blocks to comply with OFAC sanctions (not by the decision of the validators), but not all services happily follow along. One such case is Flashbots which has been quite vocal about their stance on not supporting censorship and argues because it is a US-based service it must comply by law; which begs the question - If Flashbots do not receive any profits from the service, why don’t they shut it down for the betterment of the Ethereum Network at no loss of their own?

Lack of censorship is incredibly important for both the betterment of society and the Ethereum Network. Validators need more incentives to either outsource the block building to non-censoring relays or run their own solo node. Regardless, these sanctions have once again proved the resilience of the Ethereum Network as only convenience has been impacted despite regulation by one of the largest and powerful agencies in the United States.

The SEC

“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us ... we seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.” - SEC Chairman Jay Clayton, 2017

Ever since the growth of The DAO, and perhaps even since its inception, the SEC has had its eyes on the Ethereum Network. Bitcoin had been facilitating transactions for over a decade without any laws limiting its power as an alternative currency. Any flow of a lot of money is rightfully watched by governmental agencies, for any illegal activity.

The point at which this starts to take a wrong turn is when even protocols building on the platform don’t even know what could be seen as right or wrong and the point in which their token could be seen as a security. At the moment, the SEC can find any aspects of a token and deem it as a security which needs strict regulation, exponentially increasing the barrier of entry and scaring new builders.

ICOs (Initial Coin Offerings) have become nearly extinct primarily due to the poor crypto economic landscape of 2022, but also due to the fear of being persecuted by the SEC.

What was intended to be a landscape for a free market to develop a brand - free from government regulation, has become a minefield of regulations to dodge while establishing yourself.

Skepticism, Pandering, FTX

FTX CEO Sam Bankman-Fried released a draft of possible solutions yesterday for handling sanctions and regulations. These solutions are extremely “regulation-friendly” and panders to governmental agencies - one of which proposes to handle a blacklist on-chain.

FTX has always had a questionable upbringing with essentially gambling - The platform would essentially invest in a new protocol, farm the token, short the token, and then cover the token once it was vested. This essentially was a win-win for the platform and manipulated unknowing users on the platform.

Come to the present day, Sam is now going full damage control - this statement is basically their way of trying to “clear” their past by pandering to regulatory organizations, in addition to handicapping competitor centralized exchanges to benefit and protect his own.

The statement also presents FTX as a platform that thoroughly complies with the SEC by disallowing securities from being listed on the platform. FTX is also currently under investigation by Texas for listing Voyager assets and offering crypto-earn offerings, ironic. Source

Closing Thoughts

We are certainly nearing the end of the golden-age of crypto; at least in terms of governmental regulations. The question that we have to decide amongst ourselves is how important is the integrity of the Ethereum Network’s original beliefs to me?

If your answer to that question is very, consider running a solo validator with no mev-boost relaying or staking ETH in a system like RocketPool to prevent additional censorship - hopefully returning the state of blocks to its previously clean state. Consider being more vocal and expressive when the SEC or centralized organizations take action towards the network.

The actions and reactions we take now dictate the future of the way we can interact with exchanges and our tokens.

Don’t be afraid to make your voice heard, wherever that may be. - cheers.