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Decentralization is nice, but it has its drawbacks

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Sanctions.

Certainly a buzzword in cryptocurrency circles, along with censorship, regulation and centralization.

This week demonstrated the magnitude of the problem and law enforcement’s growing interest in cryptocurrencies. The United States announced Wednesday the dismantling of a Russian-Venezuelan network that used Tether (USDT) to move money illegally.

International sanctions were aggressively imposed against Russia following the invasion of Ukraine in February. This quickly put the spotlight on cryptocurrencies and their potential ability to circumvent such sanctions.

Resistance to censorship is one of the cornerstones of cryptocurrencies

On the one hand, resistance to censorship is great. In fact, it is one of the pillars of cryptocurrencies. Thanks to this attractive quality of decentralization, individuals gain the ability to take control of their wealth and avoid the influence of governments and other central entities.

This decentralization and resistance to censorship offers all sorts of advantages. Think of those living under untrustworthy regimes, who now have a way to gain some control over wealth. Citizens see massive inflation through incompetent governments, who can now simply buy stable currencies with minimal effort, storing their value in USD.

These benefits are more or less recognized by all. For me, they present some of the reasons why I am so captivated by this strange little industry. It helps break down financial privilege, allowing citizens of developing countries to preserve their wealth. Of course, Bitcoin is incredibly volatile and is currently totally unsuitable as a store of value, but cryptocurrency also extends to stablecoins, less volatile currencies: there are a range of options.

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Is decentralization also a drawback?

Many criticize Tether on the grounds that it is centralized. Oh, you’re subject to the whims of the U.S. government, they say. And they’re right. Take a look at last month’s events with Tornado Cash, the cash shuffler in Ethereum, to see that.

The government can order Tether to freeze wallets whenever it wants, and Tether must comply. It is a regulated company, and that is how regulated companies are forced to act.

That’s why I’ve been arguing for so long about Ethereum centralization. The entire ecosystem is as dependent on centralized stables as Tether and Circle. If the capital flowing through the system is centralized and subject to censorship, how can Ethereum – or DeFi in general – be decentralized?

But we also have to face the downsides of decentralization. As magical as it is – and for all the doors it opens – there are also very significant drawbacks. The ability of actors to circumvent international sanctions is one of them. This is a worrying but very real reality, to which decentralized cryptocurrencies contribute.

What happened this week?

This week’s announcement-that the U.S. Department of Justice was charging five Russians and two Venezuelans accused of running a global money laundering ring and trading with sanctioned companies-underscores just how real this problem is.

The Justice Department announced that the defendant had facilitated the trade of hundreds of millions of barrels of oil that were then shipped to Russian and Chinese buyers. In addition, members of the cohort were accused of smuggling military technology to Russia.

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As Russia continues to terrorize Ukraine, this paints a bleak picture of cryptocurrency aiding the war effort. According to The Block, one of the accused, Russian national Yury Orekhov, told an accomplice “no worries, no stress. As soon as we start docking, we will make the transfer immediately. USDT works as fast as SMS.

Pro-Russian paramilitary groups would also have used cryptocurrencies to finance their activities. That said, Ukraine has benefited much more from the cryptocurrency side: it has raised more than $100 million following a Twitter call from its vice president.

And that’s with a centralized cryptocurrency like Tether, which means that potential concerns extend to the entire cryptocurrency, rather than just decentralized coins. However, the means available to law enforcement to curb illegal activity is greatly reduced, which is an incredible blessing but also a frightening prospect.

Is it worth it?

Like many things, there are good and bad things here.

The question is whether the good outweighs the bad. Does the power of decentralization and all the good it can offer the world outweigh the possibility of bad actors transacting more freely?

I think so, but we have to be careful how we do it, not to mention the very sinister things that go on at the margins of this industry. Law enforcement also has a role to play, of course, and the events of this week show that they are beginning to do so more and more.

To close this out, decentralization is amazing. But it’s not perfect, and that has to be recognized. Let’s hope the good continues to outweigh the bad. But the next time you talk about a utopian future built on a decentralized framework, consider the fact that there are also retreats.

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