Sanctions are a very common tool in politics, but they can have many unintended consequences. They can often lead to a ripple effect that can damage outside entities. As the U.S. Treasury rolls out sanctions against crypto mixing services, these unintended consequences are popping up across the market. One project, MakerDAO (MKR-USD), is seeing its peers rocked by the sanctions. Now, it’s preparing for a worst-case scenario in case it also suffers government penalties.
The news about MakerDAO stems from recent action by the U.S. Treasury meant to clamp down on crypto crime. The Treasury is levying several sanctions against different blockchain projects which government bodies have frequently associated with rampant issues of illegal crypto activity.
Perhaps the biggest target of the sanctions is crypto mixer Tornado Cash. Launched in 2019, the project has quickly become a notorious tool for crypto criminals. Its purpose is to anonymize transactions; Tornado Cash does so by taking users funds, mixing them up and disbursing them randomly. As a result, transactions are much harder to track.
Tornado Cash is an innocent enough tool on the surface and its uses aren’t inherently criminal; Ethereum (ETH-USD) founder Vitalik Buterin has already jumped to the defense of the project, saying he made donations to Ukraine through Tornado Cash. However, the project is a common tool for hackers and scammers in laundering funds to evade law enforcement. The most notorious user of the project is Lazarus Group, a North Korean state-backed hacking group.
Now, U.S. residents are barred from using the tool, cutting Tornado Cash off from a major crypto demographic. But the sanctions are having unintended consequences for other projects as well.
MakerDAO Preps ‘Emergency Shutdown’ Plan in Anticipation of Sanction Effects
MakerDAO developers are coming out with a dramatic plan in the wake of these sanctions: prepare to shut down at any moment. This plan might seem very worrisome on the surface, but developers say they have good reason for the decision. If the sanctions threaten the network, they can fundamentally prevent it from working as needed.
This MakerDAO news comes in response to the effect sanctions are having on Circle and its USD Coin (USDC-USD) stablecoin. As part of the sanctions, the Treasury is blacklisting addresses associated with Tornado Cash. As a result, Circle is blacklisting 81 of these addresses, freezing any USDC within them indefinitely. The value of USDC on these addresses totals $81,000.
MakerDAO’s concerns stem from its own stablecoin, Dai (DAI-USD). The project exists to support the operations of Dai, which has become the fourth-largest stablecoin in the world. But if MakerDAO ends up in a similar position to Circle, the effects will be devastating.
“If we get nuked by the U.S. government, we simply die,” says MakerDAO founder Rune Christensen. MakerDAO runs on a grip of core contracts that could quite easily come into regulators’ crosshairs. Not to mention, Dai relies on a reserve half-full of USDC to protect its $1 peg. While outsiders advise reducing Dai’s exposure to USDC, developers assert they cannot do so in the short term without creating unwanted effects across the market.
With the threat of sanctions spooking the network, Christensen and other developers are devising a plan for an emergency shutdown. A proposal is on the way to create a decentralized committee to oversee this effort in the wake of any sanctions. Still, the proposal will have to pass through the vote first.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.