GOVERNMENTS SCRAMBLE TO MANAGE, REGULATE, AND THROTTLE CRYPTO: MOST DANGEROUSLY OF ALL, THEY'RE STARTING TO MAKE THEIR OWN CENTRAL BANK DIGITAL CURRENCIES.

• Author: Doherty, Brian

ON JANUARY 15, 2022, the Canadian government closed its borders to unvaccinated American truckers and began requiring domestic truckers to show proof of COVID vaccination when crossing northward, infuriating drivers and snarling North American trade. Within two weeks, thousands of "Freedom Convoy" protesters filled the capital city of Ottawa, demanding the requirement be lifted. Officials responded by branding them "extremists," even "terrorists," and quickly began treating them as such. On February 4, the Canadian government pressured the crowdsourcing service GoFundMe--the truckers' seemingly decentralized source of financing--into abruptly stopping further transfers.

Ottawa was just getting started. On February 14, the federal government invoked the Emergencies Act, which let it freeze any bank account or legal financial instrument that could be traced to the truckers. So convoy supporters turned to bitcoin, the decentralized, peer-to-peer, blockchain-enabled digital currency whose whole raison d'etre--maintaining a separation between currency and government--seemed designed for moments like this.

Or not. Most bitcoin transactions--75 percent, according to an October 2021 working paper published by the National Bureau of Economic Research--are conducted through cryptocurrency exchanges. These, being legally licensed businesses (at least in theory), are vulnerable to the same interference as old-school financial institutions. The Canadian government demanded that the exchanges block all crypto wallets that could be linked to the protesters, and it initially seized the contents of some outright. "We will be forced to comply," tweeted Jesse Powell, then-CEO of major crypto exchange Kraken. "If you're worried about it, don't keep your funds with any centralized/regulated custodian. We cannot protect you. Get your coins/cash out and only trade p2p."

States around the world are chipping away at the freedom enhancing qualities of the purportedly permissionless virtual currencies that have proliferated since the pseudonymous Satoshi Nakamoto unleashed bitcoin in January 2009. Governments are cracking down on third-party exchanges, seeking to hoover up all transaction data to enforce tax and other laws; they are trying to classify virtual currencies as "securities" in order to tighten the regulatory grip; they are sometimes banning software and digital addresses used to transfer ownership of them. Most ominously of all, some governments are trying to get into the crypto business themselves.

WAR ON CRYPTO ANONYMITY

BY THE END of 2021, according to the industry tracking service Chainalysis, global adoption of crypto had "grown by over 2300% since Q3 2019 and over 881% in the last year." Institutional investors in 2021 traded $1.14 trillion worth of cryptocurrencies on the leading exchange Coinbase alone. Digital currency commercials so dominated the 2022 Super Bowl that advertising insiders dubbed it the "Crypto Bowl." And while the market capitalization of the crypto space plummeted to $957 billion as of early October 2022, down from a $2.8 trillion high in November 2021, that's still nearly triple the value at the start of October 2020.

The industry has grown too big for governments to ignore.

In August 2022, the U.S. Treasury Department's Office of Foreign Asset Control (OFAC) made it a crime for any American to receive or send money using digital addresses associated with Tornado Cash, a crypto "tumbling" service that pools both source-identifiable and fully anonymous cryptocurrency together in order to make it harder to forensically trace ownership of particular virtual currency from sender to eventual recipient. Tornado Cash, the government claimed, had illegally laundered more than $7 billion, some of it stolen.

In response, pranksters began sending tiny bits of the digital currency ether to many prominent figures via Tornado Cash addresses, to hit home the absurdity of treating the mere interaction with a service as a crime. (The U.S. Treasury did trouble itself to say it would not go after mere recipients of Tornadotainted ether.)

This wasn't the first time OFAC had made interacting with such a tumbler illegal for Americans, but Tornado Cash's distinct nature raises unique questions about the government's claimed power over increasingly sophisticated crypto markets and the sometimes autonomous software that such markets have come to use.

While some tumblers are essentially custodial entities with actual human beings controlling the exchange of digital currency tokens, Tornado Cash uses "smart contracts," a form of self-executing code. This kind of decentralized finance (DeFi) usually involves ethereum (the second-largest cryptocurrency per market capitalization), which was designed to enable the development of decentralized apps on top of a blockchain. Some of the addresses that OFAC sanctioned were code, untethered to individual people.

Because of this architecture, explain Jerry Brito and Peter Van Valkenburgh in an August 2022 paper for the cryptofocused think tank Coin Center, the people who created the "Tornado Cash Entity" have "zero control over the [Tornado Cash] Application today" and "can't choose whether the Tornado Cash Application engages in mixing or not, and... can't choose which 'customers' to take and which to reject." This implies that there is no actual individual who should be legitimately punishable for whatever specific crimes the app might be thought to have facilitated.

Potential First Amendment implications arise from the difference between a human provider and a blockchain-enabled piece of software. If OFAC can bar citizens from using "an ever expanding list of specific open source protocols and applications that are 'blocked,'" Brito and Van Valkenburgh ask, "then isn't that a restriction on the publication of speech?"

"Merely blocking one application is not the intent," the Coin Center authors argue. "The intent is to send a message that any example of this software is to be avoided... to chill speech such that Americans not only...