Illustration: lvcandy/DigitalVision Vectors/Getty Images; Protocol

The Tornado Cash arrest has crypto spinning

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Monday: the Tornado Cash fallout, Mastercard’s controversial “buy now, pay later” move and the profits in Brazil’s Pix payments.

Off the chain

Crypto consolidation is here. Huobi is reportedly looking to sell a majority stake in the crypto exchange, which could fetch a value of as much as $3 billion. The rebound in everything from bitcoin to Coinbase’s market cap has given some confidence that the crypto market found its bottom earlier this year. But there are still swirling questions about what makes a crypto exchange valuable: the number of wallets, the breadth of its product offering, the pricing on trades? With some air taken out of the market, we might be able to pin down more answers.

— Owen Thomas (email | twitter)

Don’t get it twisted

The sanctioning of cryptocurrency mixer Tornado Cash last week sent cryptoland spinning into a tizzy. Mixers are not only for criminals, many were quick to point out: Ethereum does not inherently protect users’ privacy, so many ether holders use mixers to provide themselves anonymity for legitimate transactions. Ethereum co-founder Vitalik Buterin, for example, “outed” himself on Twitter as someone who used Tornado Cash for donations to Ukraine to illustrate that point. But then Dutch authorities arrested a 29-year-old man who allegedly helped build Tornado Cash. And that, for some, brought the fallout even closer to home, raising concerns for a wide range of blockchain developers.

Dutch authorities say there may be more arrests. The Netherlands’ Financial Advanced Cyber Team, part of the country’s Fiscal Information and Investigation Service, began investigating Tornado Cash in June.

  • The arrested man’s name is Alexey Pertsev, his wife confirmed to the Block. He was apprehended last Wednesday in Amsterdam’s city center, two days after the United States issued sanctions against Tornado Cash. Pertsev is not a founder of Tornado Cash. The founders are Roman Semenov and Roman Storm. Neither has been arrested, and neither responded to Protocol’s requests for comment.
  • According to Dutch authorities, Pertsev is “suspected of involvement in concealing criminal financial flows and facilitating money laundering,” — not personally disobeying sanctions or making other illegal money transfers with his own funds.

Pertsev is not an employee of a company, but a developer who contributed code to a decentralized protocol. In many circumstances, this is merely a technical distinction but in this case his role may be critical.

  • When people are “hired” in a conventional sense, either as independent contractors or as employees, contracts, payroll statements and other company documents help clarify which worker was responsible for what task. Authorities can use this information to decide who to hold liable when a company breaks a law, and liability typically falls on company leadership.
  • But in crypto, oftentimes developers volunteer to build code on their own time and schedule. Pertsev was not the only Tornado Cash developer. There’s also a DAO involved, further muddying lines of responsibility. Pertsev’s arrest raises questions as to how involved an individual has to be in a protocol before being liable for its misuse.
  • The lack of clarity is precisely the issue, some experts say. “It's not clear where the line is on anything, including DAO members, investors in the project, even American miners who still process transactions for those still using the protocol,” Columbia Business adjunct professor and author Omid Malekan told Protocol.

Liability for contributing code is a complex question. Much depends on the specifics of a country’s law.

  • In the United States, for example, posting code on GitHub is legal in most cases so long as it’s not a violation of intellectual property law. That’s because code is viewed as speech protected by the First Amendment.
  • Jeffrey Blockinger, general counsel at Quadrata, says most developers don’t need to be concerned about an arrest. “While privacy concerns are legitimate, this arrest is reportedly focused on evidence of actual criminal activity,” he told Protocol. Quadrata, which provides an identity layer for blockchains, says it can help block people subject to sanctions and other bad actors from completing transactions.
  • Circle head of global policy Dante Disparte was more concerned about the arrest’s implications. In a company statement, he said the sanctioning of Tornado Cash was a serious escalation against projects at “the intersection of privacy, open software and security.” Despite those concerns, Circle has frozen smart contract addresses tied to Tornado Cash.

No matter what happens to Pertsev, the damage may already be done. Material consequences are sometimes less important than perception — and the lack of clarity around developers who contribute to the open-source code that runs much of the blockchain world could cause a chilling effect, some fear. “This arrest, if as alleged [by Dutch authorities], opens up many projects to scrutiny by various law enforcement agencies,” Tacen co-founder Jae Yang told Protocol.

— Veronica Irwin (email | twitter)

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On the money

On Protocol: Andreessen Horowitz is backing Adam Neumann’s Flow, a residential real estate startup.

Skynet Labs is shutting down. The company behind siacoin was trying to build a decentralized storage and app-hosting system.

Why are credit cards so profitable? The Consumer Financial Protection Bureau took a deep dive into the factors driving the industry’s “outsized profits.”

Mastercard’s “buy now, pay later” product is already generating a backlash. Some retailers aren’t happy with getting automatically enrolled in the program, the Financial Post reports.

The CFTC charged an Ohio man with engaging in a crypto Ponzi scheme. The commodities agency said Rathnakishore Giri had cheated at least 150 people out of more than $12 million.

Ripple is eyeing bankrupt Celsius’ assets. The company is “actively looking for M&A opportunities” to build up its business.

Patrick Pihana Branco, a crypto-backed candidate for a House seat in Hawaii, lost in the Democratic primary. Two industry-linked PACs had spent almost $300,000 backing his campaign.


Is Ethereum going to get forked by proof-of-work diehards? Vitalik Buterin doesn’t think so. The pre-Merge split is backed by a “couple of outsiders that basically have exchanges, and mostly just want to make a quick buck,” he said at ETHSeoul Friday.

Brazil’s real-time Pix payments aren’t costing banks money, central bank chief Roberto Campos Neto said, since it boosts transaction volumes and reduces cash costs. Other bankers are asking him how he got the industry to agree to it, he added. "In Brazil, they collaborated and that's why we have Pix,” he told bankers at an event hosted by lobbying group Febraban. “Banks understood that, in the end, it's a win-win model."

Coming up

The Vencent Fintech Summit is Monday through Wednesday. The three-day conference features over 70 demos in Little Rock, Arkansas.

LA Tech Week runs Monday through Sunday. The VC-centric tech summit is taking place in a variety of West Los Angeles settings, including the beach.

Sunlight Financial reports earnings Monday. The consensus EPS forecast for SUNL is $0.05 this quarter, against $0 for the same quarter last year.

Compass will also have its earnings call Monday. The consensus EPS forecast for COMP is $-0.17 this quarter, where it was $-0.02 after the second quarter last year.

OneConnect Financial Technology is expected to report earnings on Tuesday. Zacks didn’t report a consensus earnings forecast; the company lost $0.14 a share in the second quarter last year.

Jack Henry & Associates will also have an earnings call Tuesday. The consensus EPS forecast for the quarter is $1, where it was $1.04 for the same quarter last year. will report earnings Thursday. The consensus EPS forecast for BILL is $-0.68 this quarter, where it was $-0.44 for the same quarter last year.

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Thanks for reading — see you tomorrow!

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