| Privacy has always been a cornerstone of the crypto industry, but the legal action taken last week by the US government against the founders of Tornado Cash shows the limits of keeping identities under wraps. Tornado Cash is a "crypto-mixing" service that adds another layer of security to digital-asset transactions by pooling funds from different transactions before distributing them, thus making it harder to trace them to their original source. The US alleges two of the startup's founders helped launder more than $1 billion for customers that included a notorious cybercrime group in North Korea. The charges against the founders incensed crypto trade groups and raised thorny issues around code-writing and free speech. But the action also has implications for privacy-focused crypto startups and the investors who back them. For one, privacy projects will need to ensure that they're complying with laws, and putting in a concerted effort to determine whether sanctioned money is flowing through their blockchains, PitchBook crypto analyst Robert Le said in an interview. That could mean hiring more legal experts or compliance staff or auditing the code underpinning their platforms, which could be difficult and expensive for a startup. It could also make it harder for these types of companies to obtain digital-asset custody services or even cloud computing from providers like Amazon Web Services, who may now be more hesitant to work with such projects after the recent enforcement actions. There's also the potential blow to attracting venture funding, which has already become increasingly scarce when it comes to crypto since last year's downturn. While privacy-focused startups have continued to draw interest from venture capitalists, the legal uncertainty brought by Tornado Cash's troubles could dampen their appeal. The indictment against the company's founders even mentions an unnamed VC firm that invested in Tornado Cash. The firm allegedly discouraged the startup from building another service that would be compliant with anti-money laundering and know-your-customer laws. Even though the firm was kept anonymous in the indictment, it still puts an unwelcome spotlight on venture capital, which has drawn intense scrutiny from regulators and lawmakers sifting through the wreckage of 2022's blowups and scandals. The implosion of venture-backed companies like digital-asset exchange FTX and lender Celsius Network has raised concerns about VC firms not conducting proper due diligence prior to supporting these now-bankrupt companies. Some of FTX's venture investors are even the target of a class-action lawsuit alleging that they hyped up the legitimacy of the company. The US Securities and Exchange Commission proposed a rule last year that would have put more blame on VCs in the event that the startups they backed failed by making it easier to sue them for negligence. That measure didn't pass, but more examples of close entanglement between venture firms and companies enshrouded in legal uncertainty like Tornado Cash could help bolster support for future rules that rein in VCs. The action against Tornado Cash is also an unnerving reminder for the industry of the shaky ground held by crypto companies in the US. For privacy-focused startups and the VCs who invest in them, their footing just got even more unsteady. | 
No comments:
Post a Comment