In an ideal world one could take the cypherpunk view that all communication and transactions should be strongly encrypted and offer complete anonymity. But if we want to build an open society, there are limits.
My individual freedom ends where I infringe upon the freedom of my neighbor without legitimate cause. Likewise, there might be public interests which are of such particular importance that they outweigh my right to privacy, and yes, prevention of child abuse, money laundering and terrorist financing are among these potentially overweighing causes. But any such infringements must have a clear regulatory basis, be appropriate, adhere to the principle of least interference and follow due process.
All too often, this is not the case. Most recent case in point, in our opinion, are the OFAC sanctions against the mixing protocol Tornado Cash, a smart contract application running on the Ethereum blockchain that preserves privacy by allowing users to deposit assets from one address and withdraw them using a different address. In our opinion OFAC overstepped its authority by sanctioning a neutral tech solution that has predominantly been used for legitimate, privacy-protecting use cases, harming legitimate users in the process.
As a first-generation privacy-preserving application on the blockchain, Tornado Cash was a crude tool for a legitimate cause. Of course, it did have its shortcomings, most notably its inability to determine whether users are bad actors and/or to account for potential outweighing public interests. But instead of sanctioning a neutral technology, OFAC should have, in our opinion, sanctioned the concerned bad actors, and regulators should have focused on providing the necessary legal frameworks which allow the next generation of developers to perfect the technology. To this end, regulators have to stop trying to use the old, existing IRL solutions on the blockchain.