Crypto Sanction Highlights Ethical Issue of Passive Liability

Ethan Lou: This is the world we live in now, in which companies are indeed held accountable for how people use their products.

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What does cryptocurrency have in common with guns or pipelines?

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Not much, but not nothing.

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And in the context of the larger trend that recent developments point to, that’s it.

The United States government this month applied unprecedented sanctions to Tornado Cash, a blockchain app that hides cryptocurrency transactions. Dutch police, who said they were acting independently, arrested a Tornado Cash coder shortly thereafter.

There’s nothing wrong with wanting to keep your payment history secret. You may want to donate to the war effort in Ukraine without fear of being targeted by Russian authorities. You might want to subscribe to specific porn genres without revealing your tastes. Or you might just like privacy. This should not require any justification.

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But Tornado Cash has also been used by North Korean hackers to hide their tracks, the US government has said. As a result, Tornado Cash and entire groups of otherwise legitimate people are now held accountable for how North Korea used this tool.

This is not true, say large parts of the crypto community.

Alex Tapscott, a crypto entrepreneur who also contributes to the Financial Post, recently criticized the Tornado Cash sanction, saying companies are generally not responsible for how criminals use their products. “That’s why gun manufacturers aren’t punished when a gun they make is used in a murder,” he wrote.

That’s why gun manufacturers aren’t punished when a gun they make is used in a murder

Alex Tapscott

But that’s not entirely accurate. Before long, gun manufacturers could be punished when people die. In July, following mass shootings, the California government proposed a new law that allows people to sue gun manufacturers for negligence for future such killings.

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It’s a bit like how, in 2017, the predecessor of the Canada Energy Regulator declared that the environmental impact of the ill-fated Energy East pipeline was not just in its construction. It also included the environmental impact of the companies drilling for the crude that would pass through the pipe, as well as the people who ultimately use that oil.

This is the world we live in today: companies are held accountable for how people use their products.

Yes, Tornado Cash is not a business. It’s just code that doesn’t belong to anyone. But as can be clearly seen in the present case, it is not a distinction which entails a difference.

Suing companies for such passive liability has long been the way of the world. McDonald’s Corp. was once held responsible when a woman spilled coffee on herself. Anti-money laundering laws hold banks accountable for how criminals use their services, and crypto has not been immune to these rules in many jurisdictions.

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It just seems that this phenomenon now goes beyond private lawsuits and banking regulations. It is becoming more and more institutionalized, entrenched and normalized.

The movement to consider environmental, social and corporate governance (ESG) factors in investment and the rise of Big Tech have undoubtedly contributed to this change. Then there is the rise of sanctions that punish third parties for dealing with targeted countries or individuals – an intrinsic issue of vicarious liability. North Korea was sanctioned more times in 2016 and 2017 than in the previous two decades.

The question, however, is where this chain of responsibility ends.

  1. Vitalik Buterin, co-founder of Ethereum.

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  2. The Commissioner of Competition, Matthew Boswell, in one of the meeting rooms of the office of the Competition Bureau Canada in Gatineau, Quebec.

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  3. New Bitcoin, Ethereum and Dodgecoin tokens at a CoinUnited cryptocurrency exchange in Hong Kong, China.

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Tornado Cash was built on Canadian company Ethereum, a sort of base layer infrastructure on which anyone can build blockchain-based peer-to-peer games, apps, and financial instruments.

If Tornado Cash can be held responsible for how North Koreans use it, what stops authorities from suing Ethereum for the way Tornado Cash developers used this platform? Or investors in Ethereum’s ether coin?

It’s not just a cryptography issue. The streaming platform’s executives are being referred to legislative committees to find out what their users are uploading. Publishers are held responsible for the conduct of their authors outside of writing. During February’s “freedom convoy” protests, banks were held accountable for how protesters used their services.

There is a common thread in all of this. It’s that this view that corporations should take passive and indirect responsibility has gone from being just a side of the argument to becoming the indisputable premise.

Like it or not, this is a problem that every business should be prepared for.

Ethan Lou is a journalist and author of Once a Bitcoin Miner: Scandal and Unrest in the Wild West of Cryptocurrency.

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