Mises Wire

Governments Hate Privacy Software

On May 14, Alexey Pertsev, one of the lead developers of Tornado Cash (TC), was found guilty of money laundering by a Dutch court and sentenced to sixty-four months in prison. TC is a privacy-preserving protocol developed for the Ethereum blockchain: it allows users to deposit funds in a TC pool and withdraw them to a different address, thus making it impossible for external observers to track financial activity. TC is completely noncustodial, meaning that users are in control of their own money at every step of the process. In other words, developers do not have any technical means to control how individuals interact with the TC smart contracts.

Because of its privacy-preserving features, TC was sanctioned by the Office of Foreign Assets Control in August 2022: citing concerns with money laundering and terrorist financing, the United States government made it illegal for US citizens to use TC. Soon after the blacklisting by the Office of Foreign Assets Control, Pertsev was arrested in the Netherlands; Roman Storm and Roman Semenov, the other TC lead developers, were arrested by US authorities in August 2023 and charged with money laundering and sanctions violations. The sentence against Pertsev creates a precedent that threatens not only developers’ freedom to write open-source code, but also users’ ability to transact without being tracked by unwanted third parties, including government snitches. The war on privacy waged by Western regulators is in full swing.

A Truly Unprecedented Sentence

While a traditional bank is technically able to prevent clients from moving funds if it deems the transfer suspicious, this cannot happen in TC: users can interact with the smart contracts as they wish without asking for permission from anyone, including Pertsev. Even now—with Pertsev, Storm, and Semenov in jail and despite the Office of Foreign Assets Control’s sanctions—the TC smart contracts are available on the Ethereum blockchain for everyone to use.

Despite this, the judge maintains that Pertsev is guilty of money laundering because TC can be exploited by others to launder money; that is, the mere fact that criminals can use the software developed by Pertsev is enough to make Pertsev a criminal. If this principle is applied consistently, developers of privacy-preserving browsers like Tor or of privacy-preserving messaging apps like Signal may be put in jail because nothing prevents criminals from using them to communicate.

The court complains that it is common knowledge that privacy-preserving financial tools can be exploited by money launderers. However, it is also common knowledge that cars can be used by reckless drivers: Should BMW be treated as a criminal organization because of this? Should the Nokia CEO be put in jail because I may use my phone to violently hit a stranger walking down the street?

The judge claims that Pertsev should have written software that is more compliant with the law. However, TC makes it possible for users to prove that their funds come from legal activity; moreover, the TC user interface (UI) prevents the deposit of funds from known sanctioned addresses. However, this is not enough for the court because technically savvy actors can bypass the UI and interact with the smart contract directly. The sentence acknowledges the decentralized and unstoppable nature of TC and explains that it makes Pertsev’s situation worse: censorship resistance provides freedom to both law-abiding citizens and criminals, which is something the state is determined to not allow.

In the end, regulators want open-source developers to write software the government likes and to avoid writing software it does not like. Given that code is a form of speech, Western governments are waging a full-fledged attack against the freedom of expression. The Inquisition prosecuted intellectuals for writing books that were not compliant with the doctrine of the Roman Catholic Church: after all, books are dangerous because heretic ideas can be exploited to disrupt the established social order. Nazis destroyed “degenerate art” because it was not compatible with their ideology: after all, art can shape the mind of individuals, which is a privilege that only the government should be granted.

Nowadays, Western regulators put people in jail because they write software the regulators do not like. After all, open-source software may be used to boost freedom and escape financial surveillance, which is clearly unacceptable for Western governments obsessed with societal control.

It is noteworthy that the sentence mentions the guidelines on money laundering and cryptocurrencies by the Financial Action Task Force (FATF). FATF is an intergovernmental organization that “sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.”

In other words, FATF is a body of unelected bureaucrats who exercise great influence on governments and courts worldwide by issuing “recommendations” that countries cannot but implement unless they want to be included in FATF’s blacklist and therefore be sanctioned by the Western-centric financial system. Needless to say, FATF’s “recommendations” always go in the direction of financial surveillance: its risk-based approach is built on the premise that financial privacy and freedom are a risk for the stability of the financial system, which means that every transaction is suspicious by default and that individuals must prove their innocence if authorities demand so.

If everything is a risk, then writing open-source, decentralized, privacy-preserving software is a huge risk for the ability of regulators to surveil and control the financial system. This explains why the meaning of the term “money laundering” is being expanded so that developers like Pertsev can be put in jail even though they did nothing except write software that others can use autonomously.

The Need to Continue Using Privacy-Preserving Software

The theory of the division of powers states that the executive, legislative, and judiciary branches must be kept separated so that a system of checks and balances can be erected. However, the sentence against Pertsev shows that eventually the judiciary system tends to implement whatever absurdity is submitted by the other two powers. Not coincidentally, the Bank Secrecy Act established the bulk of antimoney laundering legislation in 1970, one year before the closure of the gold window and the beginning of the contemporary fiat era.

In a fiat monetary system, the value of money is backed by nothing except the trust of the people in political institutions. Given that governments are always on the brink of breaching confidence, the only way to make a fiat monetary system endure is by preventing individuals from escaping it. Without financial surveillance, the house of cards of the contemporary fiat system would have already collapsed, as it often did before 1971.

The arrest of Pertsev does not aim at tackling crime but at making an example out of him. The method adopted by the Dutch court resembles the one implemented by the Roman Inquisition. According to the Directorium Inquisitorum of 1578, “punishment does not take place primarily and per se for the correction and good of the person punished, but for the public good in order that others may become terrified and weaned away from the evils they would commit.” By sentencing Pertsev to more than five years in prison, the state wants to create a chilling effect that scares people away from writing and using privacy-preserving software. On the other hand, the governments’ actions show that they are afraid of privacy and that they know that a privacy-conscious population is one of the biggest hindrances to their power. The only viable response to the tyrannical behavior of Western governments is to normalize privacy by continuing to use software that prevents unwanted third parties from interfering with one’s private life.

In the end, liberty must never be taken for granted: acting men must fight for it. The fight starts with supporting open-source developers who write privacy-preserving code and with protecting privacy without asking for permission from the government.

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