ICLE Warns Treasury: Don’t Target Crypto’s Base Layer

WASHINGTON (Nov. 3, 2022) – As federal agencies move forward with implementing President Joe Biden’s executive order on digital assets, they should remain open to emerging on-chain privacy solutions and take care not to impose excessive liability on crypto’s “base” layer, International Center for Law & Economics (ICLE) Senior Scholar Miko?aj Barczentewicz argues in comments to the U.S. Treasury Department.

Submitted in response to Treasury’s inquiry on “Ensuring Responsible Development of Digital Assets,” the comments highlight how some base-layer participants of Ethereum responded to the department’s recent addition to the Specially Designated Nationals and Blocked Persons List of a number of Ethereum addresses deployed by Tornado Cash. Given the strict-liability duty not to facilitate transactions with sanctioned entities, many began to filter out transactions that interacted with SDN-listed Ethereum addresses, so that they would not contribute to including those transactions on the blockchain.

But Barczentewicz notes that such filtering is likely to be ineffective, given the ease with which sanctioned entities can obfuscate their identities, and could actually serve to forestall the development of changes to the Ethereum protocol to bypass such filtering.

“Targeting the base layer of permissionless blockchain networks may have symbolic value, but it is unlikely to achieve genuine law-enforcement or national-security goals,” he writes. “Imposing rules with which it would be impossible for base-layer operators to comply will simply push those operators to other jurisdictions.”

He added that it is important that federal agencies determine the appropriate policy response to these privacy-enhancing crypto technologies before there is a clash between more on-chain privacy and current investigative and enforcement methods.

“As Treasury seeks to forward the goals of consumer and investor protection, promotion of access to finance, support of technological advances, and reinforcement of U.S. leadership, all point in favor of facilitating responsible use of privacy-enhancing technologies, including so-called ‘privacy coins,’” Barczentewicz writes.

A copy of the full comments can be downloaded here. To schedule an interview with Miko?aj Barczentewicz, please contact ICLE Media and Communications Manager Elizabeth Lincicome at [email protected].