The Defi Red Notice

The past few months have been fascinating in the crypto and Decentralized Finance (DeFi) community. DeFi is an innovative technology that provides easy and efficient access to financial markets and instruments via permissionless blockchain technology. However, DeFi is notorious for facilitating financial crimes due to its decentralized nature. According to a report, about $8 billion has been laundered through DeFi.

Sidenote: This had been in drafts for months and forgotten. However, I decided to publish it now. It’s a preliminary to a much more extensive article I’m working on.

Tornado Cash - War on Code

On the 8th of August 2022, The United States Department of Treasury sanctioned Tornado Cash, a cryptocurrency mixer on the Ethereum blockchain. A crypto mixer is a tool that hides the origin of crypto transactions, making it a vital tool for those dealing with illicit funds.

On the 10th of August, Alexey Perstev, the co-founder of Tornado Cash, was arrested on suspicion of facilitating money laundering and hiding the criminal flow of money. His arrest sparked outrage in the DeFi community. The argument was that Tornado Cash is a tool, and you can't hold a creator for how his tools are used. People dubbed this a "war on code" and, by extension, a war on decentralization.

Do Kwon Wanted for Financial Crimes

Following the Luna/Terra crash, and about a month after Alexey Perstev's arrest, the government of South Korea issued an arrest warrant for Do Kwon on charges of violating the country's financial laws and subsequently requested crypto exchanges to freeze all Bitcoins tied to him. Following accusations by the South Korean government that he was on the run and evading arrest, Do Kwon took to his Twitter account to debunk the claim, saying he isn't hiding from the government and is willing to cooperate with law enforcement.

A few days back, reports of a Red Notice being issued for the arrest of Luna's CEO, Do Kwon, started making rounds. A Red Notice is a request by Interpol to law enforcement worldwide to locate and arrest international fugitives.

What this Means for DeFi

Decentralization, anti-censorship, and ease of transactions are the main selling points of DeFi and blockchain technology, of which Terra and Tornado Cash were a fundamental part. A government crackdown on both of their founders has resounding implications for DeFi and signals a paradigm shift with a sense of urgency.

We can infer that regulation might not be so far off, and crypto isn't as decentralized as people believe. This also means malicious actors would no longer be free to operate unchecked. DeFi platforms would be forced to do their due diligence in handling transactions, which is a net positive for crypto and the world.

However, cryptocurrency is about having autonomy over your finances and keeping your assets free from regulation, and central authorities like governments and banks. As such, it is anti-establishment and anti-censorship. So it seems it is now a war between decentralization and centralized establishment.

Further legislation from the government would mean privacy provided by crypto would also be challenged. It is too early to say where it all ends. However, one thing is sure: there would be more government interference in DeFi operations, which may birth more innovation in DeFi, bringing us to a truly decentralized world.