Can KYC and Permissionless Money Co-exist? Not According to This Crypto Influencer

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Michael Davis

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Michael Davis

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Last updated: 

October 23, 2023

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In light of the recent arrest of the founders of Tornado Cash, a decentralized private payments protocol built on top of the Ethereum network that severs the link between sending and receiving wallets, some are questioning whether Know Your Customer (KYC) laws and permissionless money can co-exist.

“Does bitcoins lightning network help facilitate untraceable anonymous financial transactions?… does Meta Mask do KYC?”, asked crypto influencer CryptoTea on Twitter.

“What’s stopping the cops from arresting the developers of meta mask and lightning labs?” she continued, adding that it is her understanding “that KYC laws and permissionless money can NOT coexist”.

ok i'll say it

the two founders of Tornado Cash have been arrested and charged with money laundry

they are accused of not implementing know your customer and anti-money laundering programs as required by law

let's think this through:

does bitcoins lightning network help… pic.twitter.com/pKqjMomCfY

— Crypto Tea (@CryptoTea_) August 24, 2023

According to an explainer on Kraken, most micropayments made using the Lightning Network, a layer-2 payments protocol built on top of the Bitcoin blockchain, will be “nearly untraceable”.

Meanwhile, users can set up a wallet using wallet service providers such as MetaMask without submitting any personal information, as is required when setting up accounts on platforms bound by KYC requirements.

The US government banned its citizens from interacting with Tornado Cash last year and has since been arresting its founders, claiming that they and the protocol knowingly facilitated money billions worth of money laundering, including for North Korean hacking group Lazarus Group.

Crypto community members have been highly critical of the crackdown, with some likening it to the US government arresting the inventor of the curtain, because curtains might obscure illegal behavior from an outsiders view, or to arresting the inventor of a hammer, because someone else might use that hammer to do harm. 

Tornado Cash Crackdown At Odds With Crypto’s Central Ethos

The central ethos that motivated the creator/creators of Bitcoin was the idea that they could build a decentralized, censorship-resistant, permissionless and anonymous digital currency.

That ethos was expanded by innovators such as Vitalik Buterin (the creator of Ethereum), who expanded this vision beyond just a digital currency, but an entirely decentralized, censorship-resistant, permissionless and anonymous financial system and internet – an idea broadly encapsulated by the word “web3”.

KYC requirements that governments place on financial service providers undermine two key pillars of crypto’s central ethos – its anonymity and its permissionlessness.

KYC requires that information is known about individuals before they are permitted to access financial services – because they might be baddies trying to do bad things with money (like money launder, or avoid taxes).

If KYC requirements are deemed as sufficiently met, then KYC-bound gatekeepers to the traditional finance industry may then block a person’s access to financial services.

As a result, the argument made by CryptoTea that KYC and permissionless money (like Bitcoin) cannot co-exist is a common one.

The crackdown on Tornado Cash developers, who are essentially being blamed for any money laundering that occurred via their privacy protocol, sets a scary precedent for crypto.

Is Vitalik Buterin going to be arrested next, because he was a key co-founder of a permissionless blockchain that doesn’t collect KYC information on its users?