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Following the apprehension of the creators of Tornado Cash, a decentralized private payments protocol on the Ethereum blockchain designed to anonymize wallet connections, there’s growing skepticism about the compatibility of Know Your Customer (KYC) regulations with permissionless financial systems.

CryptoTea, a notable voice in the crypto space, recently pondered on Twitter, “Does Bitcoin’s Lightning Network enable undetectable private transactions? Does MetaMask implement KYC?”

She further queried the possibility of authorities pursuing the developers behind platforms like MetaMask and Lightning Network, emphasizing her belief that KYC laws and permissionless money can NOT coexist”.

Per an overview by Kraken, the majority of transactions via the Lightning Network, a secondary payment system on the Bitcoin blockchain, are “almost untraceable”. Simultaneously, services like MetaMask allow users to establish a wallet devoid of personal data, unlike platforms that adhere to KYC norms.

Last year’s prohibition by the US government against its citizens using Tornado Cash led to the subsequent arrest of its founders. Authorities allege the founders and the platform knowingly abetted money laundering activities worth billions, including ties with North Korea’s Lazarus Group.

The crypto community has been vocal in its disapproval of these actions. Some analogies drawn include likening the move to arresting curtain inventors, since curtains might hide illicit activities, or detaining those who design hammers just because they can be misused.

Tornado Cash Arrests Challenge Crypto’s Fundamental Principles

The foundational principle guiding the creators of Bitcoin was the aspiration for a decentralized, uncensored, anonymous, and permissionless digital currency. This principle was further championed by personalities like Vitalik Buterin, Ethereum’s creator, who visualized not just a currency but a holistic digital ecosystem embodying these traits – a vision often termed “web3”.

However, government-imposed KYC stipulations for financial providers clash with crypto’s inherent values of anonymity and permissionless access. KYC protocols dictate identity verification prior to accessing financial utilities, stemming from concerns over illicit activities such as money laundering or tax evasion.

Access to mainstream financial services can be barred if KYC criteria aren’t adequately met. Consequently, CryptoTea’s viewpoint that permissionless money (e.g., Bitcoin) and KYC cannot coexist has resonated with many.

The legal action against Tornado Cash’s team raises unsettling questions for the crypto domain. With developers held accountable for potential misuse of their privacy protocols, could industry stalwarts like Vitalik Buterin face scrutiny next, given Ethereum’s non-KYC nature?