Regulating Web3: Aztec CEO Maps Out Future of Privacy After Tornado Cash Sanctions

Updated by Kyle Baird
In Brief
  • Zac Williamson discussed what the future for Web3 privacy could look like after Tornado Cash ban.
  • He believes future networks could live within the law, but not in its current form.
  • A forward-thinking government would consider directly issuing base money onto networks like Ethereum, he says.
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Zac Williamson, CEO of the Aztec Network Ethereum privacy layer, discussed what the future for Web3 privacy could look like in the wake of widely criticized U.S. government sanctions against crypto mixer Tornado Cash.

Williamson believes that “future networks could be consistent with the goals of regulators while protecting user privacy, but will not conform to existing regulatory structures.” Regulators went about it the wrong way in banning Tornado Cash, he says.

New financial renaissance

“A forward-thinking government would consider directly issuing base money onto networks like Ethereum,” Williamson outlined in a long Twitter thread.

“When coupled with hyper-fungible real-world assets, private self-custody, and low barriers to entry from open networks, we would see the dawn of a new financial renaissance,” he added.

He argued that under the current sanctions regime, hackers from North Korea or elsewhere will still use Tornado Cash or a clone.

“Questionable entities will provide off-ramps to bad actors that have done the minimum required for plausible deniability,” said the CEO.

Zac Williamson is a cryptographer. He claims that “many projects in this space build on my research and draw from the open source cryptographic algorithms I have written.”

In 2017, he co-founded Aztec Network, a layer two privacy protocol on Ethereum. The platform allows users access to a range of services in DeFi, it says, “away from prying eyes while retaining auditability and compliance.”

Williamson: ‘There is a place for regulation in Web3’

Williamson said in the near future, privacy networks could split into four: private by default; fully decentralized; user-side compliance – users can selectively prove parts of their identity (not on a sanctions list); and open and programmable.

“Programmable privacy will create exponential growth opportunities for crypto,” he explained. “Once users can link encrypted identities to cryptocurrency accounts, off-chain assets can be issued and traded on-chain without custodial middlemen.”

He sees a future in which user privacy needs and the “openness” of decentralized protocols will further lead to two distinct spheres:

‘Compliant networks’ – applications and crypto assets “that conform to the spirit of existing regulations, but need regulatory changes to conform to the letter.”

And then ‘dark networks’ — apps and digital currencies “that have no compliance built in at the protocol level.”

“Continuing down the path set by the Tornado Cash ban will prevent compliant networks from being built at all as [a] legitimate use of these networks is extinguished by fear and uncertainty,” he warned, adding:

“There is a place for regulation in Web3. It is not at the network level. It is at the application level; companies and entities that tap into Web3 to provide services to users and businesses. e.g. cryptocurrency on/off ramps and hosted wallets.”

Tornado Cash sanctions act of ‘self-harm’

Put simply, Web3 is the idea of an Internet that is decentralized and powered by technologies of blockchain tech and token-based economics. Non-fungible crypto tokens (NFT) are expected to play a key role in Web3 as a medium of exchange.

The U.S. Treasury Department sanctioned Tornado Cash on Aug. 8, alleging the privacy tool laundered $7 billion worth of crypto assets since 2019. The measures mean that all U.S. citizens and entities are banned from using the mixer.

The sanctions ignored a commitment by the mixer in April to block addresses blacklisted by the U.S. Office of Foreign Assets Control.

“The Tornado Cash ban will be seen as an act of self-harm that limited the US from reaping the wealth and job creation produced by this revolutionary industry,” Williamson said.

While decentralized crypto networks have reduced the power of the state to enforce their rules, he said “the state can claw most of this power back working with the good-faith actors in Web3 to create a new regulatory framework that acknowledges the status quo has changed.”

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