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The division of DeFi: The greater implications of the Tornado Cash sanctions

The division of DeFi: The greater implications of the Tornado Cash sanctions

As if the bear market wasn’t stressful enough for the global crypto community, a new wave of regulatory crackdown on DeFi services keeps investors on their tiptoes. The US Department of Treasury has recently imposed sanctions on Tornado Cash, the most popular cryptocurrency mixer, allegedly used by  North Korean hackers to launder $7 billion worth of virtual currencies to date.

So, what consequences will the sanctions have for everyday crypto users? And how will they impact the DeFi industry?

Unequal distribution of DeFi services

Even though the sanctions are meant to stop criminals from using DeFi services for illicit purposes, they are now creating significant risks for ordinary crypto investors. Let’s look into how it works.

Tornado Cash is seen by many as the most effective platform for ensuring privacy and security when making transactions on the blockchain. When a buyer makes a purchase through their crypto wallet, the platform anonymizes the transaction details, thus ensuring advanced privacy. However, US citizens and residents will no longer be able to use its services legally, as it could land them in prison for up to 30 years.

Even those who deposited money in Tornado Cash wallets before the sanctions can’t cash out: as they try to access the service and withdraw funds to a US bank account, they will be flagged by the regulators. Basically, every wallet address on the smart contract has been blacklisted by US authorities.

This is one of the most fundamental issues the sanctions bring: rather than targeting a specific group of criminals, it’s targeting a piece of software that exists on the public web on a peer-to-peer network. So, ultimately, its wider usage cannot be regulated equally for the entire crypto community. In my opinion, this will create a disparity in the global crypto space, as some users can leverage the unique benefits of Tornado Cash while some cannot.

Splitting services into permitted and non-permitted

Beyond the issues of accessibility and privacy, the Tornado Cash incident is creating a more significant concern about how DeFi will operate in the future. From what we can see, it has already divided decentralized platforms into permitted and non-permitted ones, causing many of them to fork. In some regions, users will require KYC and strict verification to access their services.

The bifurcation of DeFi should be a matter of worry for the entire crypto community, especially for non-permitted DeFi validators. However, there might not be a complete shutdown of non-permitted services because the decentralized space is as ample as the web is. For instance, the Tornado Cash sanction took the website down from the public internet, but the smart contract is still there on the IPFS network. So, non-permitted services will still exist: if not in the public domains, then on the peer-to-peer networks.

Ultimately, these regulations might create more problems than solutions: for one, criminals might use these non-permitted platforms to carry out money laundering and other illicit activities.

Summing up: prospects for DeFi adoption

It’s rather evident that regulatory crackdown on decentralized services will continue to increase. Still, as users might start to feel less confident about DeFi, a combination of CeFi and DeFi – or CeDeFi – might provide the much-needed assurance.

In a nutshell, CeDeFi combines centralized platforms and service providers and permissionless contracts. The regulatory framework of centralized platforms will allow users to protect their privacy on a legal basis while allowing them to access decentralized assets and services.

The emergence of CeDeFi might also create significant isolation among developers and operators, especially in legal terms. We might see both groups take on legal liabilities very differently. For example, operators could be held liable for illicit services on the platforms, while developers would be responsible for any maleficence on the technical side.

Summing it up, the future of DeFi adoption is vague amidst the growing regulatory concerns. However, the rapid emergence of CeDeFi is almost imminent.