How Should DAOs be Regulated? A New Perspective on Decentralization

On August 8, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned the service of ‘Tornado Cash,’ a so-called mixer used to obfuscate the otherwise transparent money trail on the Ethereum blockchain. The service was claimed to launder more than USD 7Bn in illicit funds, of which USD 455m were funds initially stolen by the Lazarus Group, an infamous hacker group with alleged ties to the North Korean government. Curiously, Tornado Cash is an open-source software project comprising several smart contracts deployed on the Ethereum blockchain. Users of Tornado Cash operate independently by sending funds through smart contracts, which encrypt the money trail by submerging the funds in a liquidity pool from which the sending user can withdraw an equivalent amount of funds to a brand-new address with no prior money trail. How, then, is it possible to sanction an autonomous smart contract, and how will these precedents set in today's enforcement actions impact the future of the decentralized autonomous organization (DAO)? This paper discusses complications from recent enforcement actions and calls for regulators to improve their approach and seek solutions for mitigating the ‘blind person fallacy’ rather than acting with blanket sanctions of open-source technologies or invent new rules through enforcement actions that have a wide-reaching impact and should rather be subject to a proper process