Key Takeaways

• The White House’s new crypto framework and other developments out of Washington DC show that regulation is coming to the digital assets space.
• The Treasury Department recently sanctioned Tornado Cash and could extend its blacklisting to other privacy-focused projects.
• The likes of XMR, DAI, and XMR could suffer amid increased regulatory pressure, but many other crypto tokens could also be affected.

Several crypto projects could face enforcement action under recently proposed regulatory guidelines.
U.S. Moves Toward Crypto Regulation
The U.S. government is getting to grips with digital asset regulation.
In recent months, comments from key members of the Biden Administration, enforcement from regulators, and several reports have shed light on how the U.S. government intends to regulate cryptocurrencies. Treasury Secretary Janet Yellen has been particularly vocal in calling for digital asset regulation, specifically concerning dollar-pegged assets. After the collapse of the TerraUSD stablecoin in May, Yellen and several members of Congress committed to drafting a comprehensive stablecoin regulatory framework to help protect U.S. investors. A draft of a new bill regulating stablecoins released last week includes a two-year moratorium on “endogenously collateralized stablecoins” and would potentially require all non-bank stablecoin issuers to register with the Federal Reserve.  
The Securities and Exchange Commission and the Commodities and Futures Trading Commission have also recently stepped up their crypto enforcement efforts. In July, the SEC accused crypto exchange Coinbase of listing “at least nine” tokens that it believes should be classified as securities. The regulator has also revealed it is conducting investigations into all U.S.-based crypto exchanges after chair Gary Gensler indicated that he believed several platforms were breaking securities laws by trading against their own customers. The CFTC, typically seen as more lenient on crypto regulation than the SEC, has also sparked concern among crypto users over the past few days after it filed a first-of-its-kind case against the decentralized autonomous organization Ooki DAO for allegedly running an illegal derivatives trading platform.
However, the bulk of information regarding possible crypto enforcement came from the White House’s first crypto regulatory framework released earlier this month. The document detailed how multiple government agencies would seek to oversee the growth of the digital assets space and focus on goals ranging from promoting access to financial services to fighting financial crime. 
With so much documentation being drafted and released, it’s becoming increasingly difficult to understand how it will all interact with the current crypto landscape. Crypto Briefing takes a look at three cryptocurrencies that could face regulation under recently-released legislation. 
Tornado Cash (TORN) 
After the Treasury Department sanctioned Tornado Cash, the privacy protocol’s TORN token might be the most obvious crypto asset that could face regulatory scrutiny in the future. 
On August 8, the Treasury’s Office of Foreign Assets Control announced it had sanctioned the protocol because it had “failed to impose effective controls” to prevent cybercrime-related money laundering. 
Tornado Cash lets users deposit ETH or USDC from one Ethereum address and withdraw it to another, breaking the line of traceability typically present on open ledger blockchains. While many crypto natives have used the protocol for legitimate purposes such as maintaining financial privacy, it’s also become a popular avenue for cybercriminals looking to launder stolen digital assets. 

The Biden Administration’s crypto regulatory framework has made it clear it intends to combat all forms of crypto-related crime. The report points to digital asset use among the likes of Lazarus Group—a North Korean state-sponsored syndicate responsible for several major crypto hacks over the past year. With such a hardline response toward criminal groups, any protocol helping them launder their ill-gotten gains will be a prime target for further enforcement. 
Although the U.S. has sanctioned Tornado Cash’s code, criminalizing any interaction with the protocol in the States, there is little authorities can currently do to enforce the ban. Still, many other DeFi protocols that wish to serve U.S. users have proactively complied with the sanctions, blocking addresses that have interacted with Tornado Cash from using their services. 
In response to the enforcement action against Tornado Cash, TORN lost a significant amount of value, dropping from a local high of $30.43 to $5.70 today. As the protocol’s developers have shown little interest in modifying Tornado Cash to help it comply with anti-money laundering regulations, it’s unlikely that future U.S. crypto regulations will do anything but hurt it and its token going forward.
MakerDAO (MKR and DAI) 
While the Maker protocol and its overcollateralized DAI stablecoin haven’t yet been implicated in any U.S. crypto regulation, users anticipate that it might happen in the not-too-distant future. 
MakerDAO co-founder Rune Christensen recently posted an “Endgame Plan” to the DAO governance forum, outlining how the protocol could position itself to weather future crypto regulation. In his proposal, Christensen suggested lending out DAI against real-world assets and using the interest earned to buy ETH on the open market. The degree to which MakerDAO successfully accumulates ETH over the next three years will determine whether or not it should consider letting DAI drift from its dollar peg to become a free-floating asset. 
Christensen believes that MakerDAO is likely to draw attention from U.S. regulators because it issues a dollar-pegged stablecoin. When this happens, the Maker protocol would be unable to comply with anti-money laundering sanctions similar to those issued against Tornado Cash even if it wanted to. In Christensen’s eyes, it would be a better long-term option to allow DAI to drift from its dollar peg and become a free-floating asset, reducing the regulatory burden placed on the protocol. 
For the time being, it looks unlikely that MakerDAO will need to implement any such plans. A newly released draft of a House Stablecoin Bill produced under Yellen’s direction suggests a more conservative approach to stablecoin regulation. In the proposed draft, only Terra-like stablecoins solely collateralized by tokens from the same issuer would face enforcement action. However, the draft also requires all non-bank stablecoin issuers to register with the Federal Reserve to continue serving U.S. users. As the details of such legislation are yet to be defined, it’s unclear whether this requirement would mean MakerDAO is unable to comply. 
If MakerDAO cannot register as a non-bank stablecoin issuer in the U.S., it will likely impact the value of the protocol’s MKR governance token. DAI could potentially become a restricted asset within the States, and OFAC could even sanction the Maker protocol’s smart contracts as it did with Tornado Cash. While this situation currently appears unlikely, it’s still worth taking note of MakerDAO’s regulatory risk. 
Monero (XMR)
Last on our list isn’t an Ethereum protocol like Tornado Cash or Maker, but an entire blockchain—Monero. 

Launched way back in 2014, Monero is arguably the most successful privacy-focused blockchain that sees active use and development today. Unlike Bitcoin or Ethereum, which broadcast all transactions and wallet balances on a public ledger, Monero’s transactions are completely private. The network uses several privacy-preserving features such as ring signatures, zero-knowledge proofs, stealth addresses, and IP address obscuring methods to ensure privacy and anonymity for all users. 
Like Tornado Cash, Monero’s ability to obfuscate the ownership and origins of coins has drawn the ire of regulators in the U.S. In 2020, the Internal Revenue Service started offering a cash bounty of $625,000 to anyone who could successfully crack Monero’s privacy and reveal users’ transactions. However, that bounty has never been claimed, which speaks to the strength of Monero’s privacy technology. 
Still, Monero’s resilience is a double-edged sword. While it may make using the network more appealing to those looking to preserve their financial privacy, it also makes it a potential target for further regulation and enforcement action. Similar to Tornado Cash, cybercriminals use Monero for a range of illicit activities. For example, cybersecurity firm Avast has previously identified malware that uses the victim’s computer to mine Monero and send the profits back to the virus’ creator. 
While Monero is a prime candidate for enforcement even under current regulations, no action has been taken against it. Authorities have likely focused their efforts on protocols that facilitate a higher volume of illicit transactions (such as Tornado Cash) instead. However, if the crypto space—and Monero—continue to grow, it’s likely only a matter of time before OFAC dishes out further sanctions against privacy protocols. 
As has been the case with Tornado Cash and TORN, any kind of enforcement against Monero will almost certainly affect XMR. All U.S.-based crypto exchanges already refuse to accept Monero deposits or open spot markets for XMR as they can’t verify if tokens have been procured through illegal activities. Further regulation, both from within the U.S. and abroad, will likely limit access to the blockchain or make sending transactions through it illegal—and that would be bad news for XMR. 
The Future of U.S. Crypto Regulation
While Tornado Cash, MakerDAO, and Monero are among the crypto projects most likely to be implicated by future regulations, numerous other tokens could also be affected. In the U.S., at least, it’s likely that all protocols that facilitate the trading of valuable crypto assets will need to comply with some form of anti-money laundering regulation in the future. 
Additionally, those issuing their own dollar-pegged stablecoins will likely face additional regulation, both due to the perceived safety of the dollar as a national currency and the mounting pile of failed stablecoin projects that have cost U.S. investors billions of dollars. Still, whether such regulation will hurt crypto adoption or facilitate its adoption by the mainstream remains to be seen. While some recent cases from the SEC and CFTC appear to take a hardline approach against crypto, others like the House Stablecoin Bill are comparatively lenient. 
Whether those in the space like it or not, crypto regulation is coming. And those who are aware and understand the possible effects will be better positioned for the changes than those who stick their heads in the sand. 
Disclosure: At the time of writing this piece, the author owned ETH, BTC, and several other cryptocurrencies.