When it comes to crypto regulations some of the most concerning involve the concept of on-chain censorship, this is when minors or validators enforce the laws of a country on the cryptocurrency blockchain they’re securing.
There were concerns that Ethereum validators would begin censoring sanctioned transactions once Ethereum’s transition to proof of stake was complete, this is because the biggest Ethereum validators are based in the USA.
Some of you may know that around 45 percent of Ethereum validators are now censoring Tornado Cash related transactions on the Beacon Chain what some of you may not know is that this on-chain censorship isn’t because of the validators per se but the Mev software providers that they’re using now for those unfamiliar maximal extractable value or Mev is basically where miners or in this case validators have the power to rearrange transactions in blocks before they’re added to the blockchain.
Now this is obviously bad which is why software exists to minimize the practice that is the TLDR.
The most popular Mev software for Ethereum is Flashbots which essentially swore to comply with the Tornado Cache sanctions back in August as such any Ethereum validator leveraging Flashbots has been knowingly or unknowingly censoring Tornado Cash related transactions.
Now it should take you no more than two seconds to realize that this on-chain censorship is a very slippery slope, today it’s enforcing sanctions against objectively Bad actors tomorrow it could be enforcing KYC on Ethereum wallets or IRS reporting for all East transactions above a certain amount.
Now the mere Prospect of such a progression was more than enough to push Flashbot’s co-founder Stefan Gosselin over the edge in his debate about on-chain censorship with his colleagues.
As far as I understand he was against the company’s on-chain censorship and his colleagues were in favor, now if you want evidence that enforcing sanctions on chain is the start of a slippery slope look no further than Dapper lab’s recent response to Europe’s new crypto sanctions on Russian citizens.
The company straight up blocked Russians from accessing their crypto Wallets on the flow blockchain.
Now to clarify it’s not entirely clear, whether the crypto wallets in question were custodial or not there do not seem to be many details about this now but it appears the ban applies to Dapper labs’s custodial wallet which is the main gateway to access the flow blockchain.
Truly scary stuff.