Tornado Cash sanctions and the trend towards currency multipolarity
The United States government’s sanctioning of the open-source code that makes up the Tornado Cash privacy protocol might come as a shock but it is hardly surprising. America has controlled the global financial system for decades and recently has been tightening its grip ostensibly to cut down on bad behavior but also to project power abroad.
Economic sanctions, like the ones enforced by the Office of Foreign Assets Control, are a powerful weapon. The agency is responsible for enforcing economic and trade sanctions based on U.S. foreign policy and national security goals. It is aimed at fighting terrorists, and other threats to the national security, foreign policy or economy of the United States.
This is of particular concern, as it is enforced by the issuer of the global reserve currency. Global currencies are meant to be neutral, the more the U.S. weaponizes access to the dollar, the greater the incentive for every other country to find an alternative and fuel the movement to a world of currency multipolarity. One likely winner from this dynamic is Bitcoin.
Fiat currencies like the U.S. dollar have no inherent transfer mechanism. Large payments can only be made through the banking system, and banks need government charters to operate. This symbiotic relationship enables governments to not only control the issuance of their money, but also access to it. For the issuer of a reserve currency, monetary censorship becomes a powerful weapon used towards crushing enemies both foreign and local.
Bitcoin and its decentralized governing mechanism makes it a censorship-resistant payment system. Anyone can make payments to anyone else — with or without the involvement of a licensed intermediary. Governments can still wield power over individual exchanges, custodians, or miners, but they can’t stop the protocol or the community that runs it.
Bitcoin is also apolitical in ways that fiat currencies can never be. Along with ever stricter sanctions regimes, the U.S. has recently taken the drastic step of freezing the foreign exchange reserves of Russia and Afghanistan. Regardless of one’s opinion of the legitimacy of such acts, they drive home the point that dollar reserves are only useful so long as their owners stay on America’s good side.
A critic could argue that the sanctioning of Tornado Cash proves cryptocurrencies are not immune from politics. Indeed, the U.S. has been sanctioning Ethereum and Bitcoin addresses for years. What makes crypto unique is the fact that it is decentralized and it can still operate in other jurisdictions.
The permissionless nature of these networks means that the users can continue to process transactions for sanctioned addresses. That doesn’t mean that a European miner or South American exchange wants to upset Washington, but it does mean that they could if they had to. This optionality may come in handy in a crisis.
None of this means that the world will shift to a Bitcoin standard in the near future. The infrastructure remains raw, and most governments remain cautious, in part because censorship resistance also challenges their monetary grip at home. The more the world deglobalizes, and the more America tries to enforce her will on other countries, the more we see currency multipolarity and rise in the use of Bitcoin and other digital currencies for international settlements.
This relatively new threat to the dollar could be one explanation why America refuses to pass sensible crypto regulations, despite a thriving domestic industry. The more the U.S. normalizes Bitcoin as a store of value internally, the higher the odds that it gets adopted as a reserve asset abroad. We have now seen giants like Blackrock stepping into this sector with trillions of dollars behind them.
Countries don’t need to put their entire reserves in Bitcoin to benefit from its utility. Given its relative youth and volatility, it would be risky to own too much — just ask El Salvador. But as a “break-glass-in-case-of-emergency” reserve asset, a little bit would go a long way.
Like any aging empire, America is likely to react to this competition. If other countries do start adopting Bitcoin, then Washington may become even more Draconian with the use of sanctions, trying to blacklist coins held by regimes it doesn’t like, and punishing miners who process certain transactions. But that would mostly hurt the American crypto industry while reinforcing the need for a global alternative.
Historically, the most popular reserve currencies have been issued by countries with trustworthy legal systems. The more arbitrary American sanctions become, the less trust others will have in its money. This could pave the way for accelerated adoption of Bitcoin and other digital currencies in the future.
By Chas Gunaratne