Aztec founder discusses the future of privacy networks: viewing open-source encryption software as sanctioned entities is a dark regression

Author: Zac Williamson

Compiled by: Kyle, The Way of the Metaverse

In light of the Tornado Cash ban, I have some thoughts on the future of privacy networks that I would like to share.

Viewing open-source cryptographic software as a sanctioned entity is a dark regression, reminiscent of the 1990s. In that era, sharing cryptographic software could label you as an international arms dealer.

1: What will the future of the network look like?

The future network can align with regulatory goals while protecting user privacy, but it will not follow the existing regulatory framework.

Regulators need to take significant action. Given the events of this week (Tornado being sanctioned), this seems unlikely at the moment, but it is inevitable.

Why? The current approach of the U.S. government will not achieve its strategic goals.

First, I want to describe what privacy networks might look like in the near future:

1. Default private

2. Fully decentralized

3. User-side compliance; users can selectively prove parts of their identity, such as not being on a sanctions list.

4. Open and programmable

Programmable privacy will create exponential growth opportunities for cryptocurrency.

Once users can link their cryptographic identity to cryptocurrency accounts, off-chain assets can be issued and traded on-chain without custodial intermediaries.

Visionary governments will consider issuing base currency directly to networks like Ethereum.

Combined with alternative real-world assets, private self-regulation, and low barriers to entry in open networks, we will see the dawn of a new financial renaissance.

2: What can privacy bring?

The openness of decentralized private networks will lead to two distinctly contradictory realms:

• "Compliance networks": Applications and digital currencies that align with the spirit of current regulations but require regulatory changes to comply.

• "Dark web": Applications and digital currencies without built-in compliance at the protocol level.

From the perspective of Western governments, the latter is understandable. However… the existence of compliance networks requires a grudging tolerance of the dark web at the network level.

Why is that?

In decentralized networks, there are no arbitrators, auditors, or third parties to determine whether applications are compliant. Decentralized networks are designed to be permissionless by necessity.

Continuing down the path of imposing bans like the Tornado Cash prohibition will hinder the establishment of compliance networks, as the legitimate use of these networks will vanish due to fear and uncertainty.

3: What kind of future will we have?

There exists a regulatory space in Web3. It is not at the network level. It is at the application level; companies and entities that utilize Web3 to provide services to users and businesses. For example, cryptocurrency deposit and withdrawal channels and custodial wallets.

For the U.S., requiring deposits and withdrawals to use Tornado Cash compliance tools instead of blanket bans would be more effective.

It is frustrating that we have already gone through all of this with the World Wide Web. We do not arrest internet service providers for the data in their cables. We do not arrest DNS providers for signing illegal traffic.

For Web3 to thrive, it must remain credibly neutral.

4: Will regulators see the light?

The current approach does not achieve the strategic goals of the U.S. Hackers will continue to use TornadoCash (or clone projects). Suspicious entities will provide deposit and withdrawal channels to bad actors who meet the minimum requirements for plausible deniability.

Their actions also undermine the dollar's hegemony. The damage done to USDC is incalculable. Central institution-backed dollar stablecoins now carry a risk premium.

Looking back, the TornadoCash ban will be seen as a self-harming act that limited the U.S. from benefiting from the wealth and job opportunities created by this revolutionary industry.

I do understand the actions of U.S. regulators. A new disruptive technology has emerged that undermines their ability to enforce the law.

Any action that does not comprehensively ban TornadoCash will represent an acknowledgment that their capacity to exercise power has diminished.

The problem is they are not fighting against people or institutions. They are fighting against a technology. Trying to ban cryptographic algorithms is like trying to ban mathematics.

The reality is that decentralized cryptocurrency networks have already diminished the state's power to enforce its rules (the TornadoCash ban cannot stop hacking activities). Otherwise, this reality will only harm their interests.

States can reclaim much of their power, but this requires cooperation with well-intentioned actors in Web3 to create a new regulatory framework that acknowledges the changed status quo.

The first Western country to do this will reap significant benefits.

In my view, the key roles we are building have not yet fully emerged in our nascent industry. Mainstream users:

• Users who cannot access reliable banking network services.

• Users in regimes where currency is used for social control.

• Users whose financial institutions are beholden to serve the state.

The technology we are building is not yet advanced enough to meet their needs.

There exists a brief window in this process, where harsh regulation may stifle the innovation we need to achieve our goals.

The most affected individuals have no voice; will you speak for them?

Money is the commodified human agency.

If we cannot control our finances, we are not truly free.

Without financial privacy, we cannot control our finances.

This is the beginning of a long and arduous war of attrition. I believe that after exhausting all possible alternatives, regulators will gradually move towards a future that protects and celebrates user privacy.