US Securities and Exchange Commission (SEC) Commissioner Hester Peirce told an audience of blockchain researchers and practitioners on Monday that lawmakers and regulators need to protect people’s right to transact privately.
Her comments come as Roman Storm’s Tornado Cash trial heads toward a verdict.
Peirce said in a speech at the Science of Blockchain Conference that privacy-protecting technologies and the right to self-custody crypto should be safeguarded, along with the rights of developers of open-source privacy software, who shouldn’t be held responsible for how others use their code.
“We should take concrete steps to protect people’s ability not only to communicate privately, but to transfer value privately, as they could have done with physical coins in the days in which the Fourth Amendment was crafted,” she said.
“Although a centralized intermediary or even a DAO deploying a DeFi application could build in restrictions on its use, an immutable, open-source protocol is available for anyone’s use in perpetuity, so requiring that it comply with financial surveillance measures is fruitless.”
Peirce’s comments come amid jury deliberations in the trial of Roman Storm, co-founder of the crypto mixing service Tornado Cash, which allows users to mask the origin and destination of cryptocurrency from prying eyes.
Stifling privacy technologies slows innovation
In the 1990s, governments, for national security reasons, wanted to keep strong cryptography out of private hands, according to Peirce.
She noted it took court cases and pushback from cryptographers such as Phil Zimmermann — the developer of Pretty Good Privacy (PGP) encryption software — to turn the tide, leading to many technological advancements.
“The internet could not have succeeded without strong cryptography, so a determined set of cryptographers pushed back and convinced the government that cryptography in private hands was a net positive,” she said.
“Because of their hard-fought victory in the courts and the court of public opinion, we daily rely on encryption to send email, engage in online banking, buy from online merchants, communicate with one another through voice and video, and conduct many other daily tasks.”
DeFi broker rule should stay dead
In the same speech, Peirce also said that regulators shouldn’t be asking businesses to keep a record of who they or their customers transact with, as was nearly enforced by the so-called decentralized finance (DeFi) broker rule.
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“Doing so would deputize us to surveil our neighbors—a practice antithetical to a free society. Nor should we require an intermediary to step in the middle of peer-to-peer transactions,” she said.
“As with the internet, technologies that have legitimate uses are better left in the permissionless, available-for-all-to-use category, even though doing so enables people to use them for bad purposes, because taking any other course would impinge fundamental liberties.”
Before US President Donald Trump killed it on April 10, the Biden administration-era DeFi broker rule would have required DeFi protocols to disclose gross proceeds from crypto sales, including information regarding taxpayers involved in the transactions, to the Internal Revenue Service.
Crypto mixers on trial
Storm is standing trial in the Southern District of New York over allegations that criminal elements used the mixing service for money laundering and that Storm is responsible for facilitating their actions. If convicted, he could face up to 40 years in prison.
Storm’s defence team and the industry argued that Tornado Cash, like any tool, can be used by both normal citizens and bad actors and the software developers shouldn’t be held responsible for the actions of others.
In a similar case, the co-founders of Samourai Wallet are facing charges stemming from their involvement in the crypto mixing protocol. They opted to plead guilty on July 29 after initially trying to get the case dismissed.
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