Do Contemporary Regulators Draw from Inquisition Practices?

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The Mises Institute, a non-profit research and educational center at the Austrian School of Economics, recently published a study examining the court decision against the crypto mixer Tornado Cash, arguing that modern regulatory methods closely resemble those of the medieval inquisition. How appropriate is this comparison?

A Brief History of Tornado Cash

On May 14, Alexey Pertsev, one of the lead developers of Tornado Cash, was convicted by a Dutch court of money laundering and sentenced to 64 months of imprisonment.  

Tornado Cash is an Ethereum-based protocol that enables users to perform anonymous transactions. It functions like a mixer: users deposit their funds into a general pool where they are blended with other coins before being withdrawn to a specified address. This method makes it difficult for third parties to trace financial activities. Notably, the protocol operates on a noncustodial basis, meaning that users are in control of their funds at any stage of the process.

The mixer has frequently been targeted by U.S. regulators, and its developers, Roman Storm and Roman Semenov (the latter charged in absentia), were accused in August 2023 by the U.S. authorities of facilitating the concealment of over $1 billion and ignoring cybersecurity crime warnings.

Tornado Cash Developers. Source: Reddit

Tornado Cash Developers. Source: Reddit

What’s Wrong with the Accusation?  

The Mises Institute highlights that, unlike traditional banks where transactions can be blocked upon detecting suspicious activities, Tornado Cash offers its users complete autonomy. Transactions with its automated smart contracts don't require permissions from any third parties; the contracts simply execute when their conditions are met. This simplicity is integral to the system.  

Pertsev, Storm, and Semenov had no means to directly influence these smart contracts. Tornado Cash continues to function on the Ethereum blockchain, accessible to the public.

Nevertheless, the court convicted them on charges of money laundering, asserting that Tornado Cash could potentially be used for illicit purposes.   

This rationale is akin to blaming car manufacturers for the actions of reckless drivers. Would it be reasonable to deem BMW a criminal organization, or to imprison the Nokia CEO if a criminal used one of their smartphones for extortion?

The judge reprimanded the developers for not creating law-abiding software. However, Tornado Cash allows users to verify the legality of their transactions, and it automatically blocks transactions from sanctioned addresses. The court, however, considered these measures inadequate, arguing that tech-savvy individuals could still find ways to bypass these protections and interact directly with the smart contracts.

The verdict recognizes the decentralized and uncontrollable nature of the mixer but paradoxically holds the developers accountable for this characteristic. This case sets a worrying precedent: the developers of privacy-focused software, such as the Tor browser or Signal messenger, could now potentially face legal action if criminals use their platforms. Similarly, developers of other cryptocurrency mixers currently operational could face arrest at any moment.

This case exposes a fundamental tension: the government's unwillingness to accept that tools designed to evade censorship can empower both law-abiding citizens and criminals alike. 

And this fact cannot be ignored.

How Does This Relate to the Inquisition?

Researchers at the Mises Institute argue that authorities are insisting open-source software developers only create programs that align with governmental notions of privacy. They see this as a significant infringement on freedom of speech, considering that coding is a form of language.

Historically, six hundred years ago, the Inquisition targeted intellectuals for authoring books that contradicted the Catholic Church's doctrines. These books were seen as dangerous because they propagated heretical ideas that could disrupt the established social order. A century ago, the Nazis destroyed what they called "degenerate art," which did not align with their ideology, believing that art shapes public consciousness—a power they felt should belong only to the state.   
Inquisitors burned books. Source: readermagazine

Inquisitors burned books. Source: readermagazine

Today, developers face imprisonment for creating software that does not meet regulatory approval. Open-source software, which can increase freedom and bypass financial controls, is deemed unacceptable by these regulators.  

The paper currency system relies on a precarious foundation of trust in political institutions. Without real backing, such as gold or other tangible assets, the value of fiat money hinges solely on public faith in a government's solvency. Economic crises, inflation, and devaluation starkly show how quickly this fragile trust can collapse when confidence in the system fades. Recognizing this vulnerability, governments are determined to maintain this trust at all costs. Financial oversight, whether through tracking transactions or banning virtual currencies, is employed as a tool to sustain this delicate confidence.

The Mises Institute interprets the prosecution of Tornado Cash's founders as an effort to intimidate those who think differently, to stifle the movement towards financial decentralization, and to keep a tight grip on the monetary system. 

These tactics bear an unsettling resemblance to those of the Inquisition. The strategy of condemning "incorrect" ideas and imposing severe punishments serves to scare others into compliance. 

Intimidation, a principal tactic outlined in the 1578 Directorium Inquisitorum—a standard manual for inquisitors—emphasizes that “… quoniam punitio non referencetur primo per se in Correctem bonum eius qui punitur, sed in bonum publicum ut alij terreantur, amalis committendis avocentur” (“punishment is not meted out primarily for the correction of the individual but to serve as a deterrent to the public from committing evil, thus maintaining public order”).  

Is It Time to Start Worrying?  

However, the situation might not be as grim as the libertarians at the Mises Institute make it out to be.Firstly, it’s reasonable to assume that this platform, with its roots in russia, could have been used for laundering money by state officials and oligarchs from a country that has faced international sanctions. 
Thus, it's difficult to feel much sympathy for Pertsev, Storm, and Semenov.Secondly, the behavior of the regulators seems to exemplify the Dunning-Kruger effect

This cognitive bias suggests that individuals with low competence in a specific area tend to overestimate their abilities, which leads to ignorance and, as a result, undue confidence and poor decisions that they are unable to fully comprehend.Seriously, does Gary Gensler fit the role of the Grand Inquisitor?