Last week, the US Department of Treasury's Office of Foreign Assets Control (OFAC) imposed sanctions on Tornado Cash, a cryptocurrency mixing service that it says has links with North Korean hacking group Lazarus.
The move means that anyone who has come into contact — sometimes unintentionally — with Tornado’s sanctioned smart contracts faces serious consequences, including up to 30 years in federal prison.
In response to the ruling, Circle — the central issuer of the USDC stablecoin — froze 75,000 USDCs linked to Tornado Cash. This effectively locks any user of Tornado out of their money, regardless of whether they are accused of committing a crime.
This is an unprecedented situation in blockchain and cryptocurrency that has left many questioning what is happening in an industry that was originally founded to be a globally decentralised ecosystem, but where it now seems not even the most basic of human rights are being upheld.
Privacy is a legitimate use case
The privacy use-case for Tornado Cash in a blockchain-based system, in which any transaction we make is fully visible to anyone with our wallet address, is clear.
After the ruling, Ethereum co-founder Vitalik Buterin publicly outed himself as a user of Tornado Cash, which he claimed to have used to donate anonymously to Ukraine and hide his identity from the Russian government.
According to Chainalysis, only 11 per cent of funds transacted through Tornado were stolen, while only 18 per cent came from sanctioned entities (largely hit with sanctions after the transaction).
If this data proves correct, 71 per cent of Tornado Cash’s traffic comes from users who use the tool for privacy matters — a legitimate use-case protected by Article 12 of the Universal Declaration of Human Rights.
The risks of centralised stablecoins
Most concerning is Circle’s part in this case, as it was not technically compelled to freeze those funds according to the language of the sanctions.
Neither was this the first time it froze USDCs in response to law enforcement actions. This highlights the inherent risks associated with centralised stablecoins.
The largest stablecoins by market capitalisation are issued by centralised entities Tether (USDT), Circle (USDC) and Binance (BUSD).
Together, they account for $169 billion of cryptocurrency’s $1 trillion market cap and, as it currently stands, Tether, Circle and Binance have the power to strip individuals of their digital property without due process.
Article 17 of the Universal Declaration of Human Rights states that “everyone has the right to own his property, either alone or in community with others”.
“No one shall be arbitrarily deprived of his property,” it says.
Reflecting upon these key tenets of human freedom, Circle’s recent action should serve as a wake-up call to the cryptocurrency industry.
Decentralised stablecoins protect the right to own property
Stablecoins are an important part of the inherently volatile cryptocurrency ecosystem. With their price remaining more or less fixed, they are used to generate income throughout the cryptocurrency ecosystem.
However, stablecoins do not need to be centralised. One of the oldest stablecoins — DAI — is decentralised. Governed by its community with a price peg dictated by a combination of fiat and crypto assets, DAI has held strong while many centralised projects that jumped on decentralised finance's (DeFi) success have crumbled.
DAI uses USDC as part of its asset mix. However, this is under review as a result of Circle’s decision to fall in line with US government sanctions.
Decentralised stablecoins have the ability to preserve and grow wealth in their own custody, without any risk of confiscation by a centralised entity. They are entirely the property of their owner — as any asset should be either in the “real” or cryptographic world.
More than this, though, decentralised stablecoins have the potential to innovate in ways that centralised, fiat-backed stablecoins do not.
As is the case with DAI, they can choose how and where they derive their value. Rather than a depreciating asset such as the US dollar, for example, their value could be pegged to the price of a basket of goods to track inflation, or to the value of gold or oil.
In this way, decentralised stablecoins can become a proxy for market values while remaining fully liquid: an invaluable asset to those whose livelihoods might be closer tied to commodity prices than the fickle US dollar.
With the right leadership and development, blockchain and DeFi can solve problems that traditional finance and fiat currency cannot. This could — and should — pave the way for a new era of economic progress that is more inclusive, equitable and free.
Stefan Rust is the founder of Laguna Labs, a blockchain development house, and former chief executive of bitcoin.com
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In numbers: PKK’s money network in Europe
Germany: PKK collectors typically bring in $18 million in cash a year – amount has trebled since 2010
Revolutionary tax: Investigators say about $2 million a year raised from ‘tax collection’ around Marseille
Extortion: Gunman convicted in 2023 of demanding $10,000 from Kurdish businessman in Stockholm
Drug trade: PKK income claimed by Turkish anti-drugs force in 2024 to be as high as $500 million a year
Denmark: PKK one of two terrorist groups along with Iranian separatists ASMLA to raise “two-digit million amounts”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
