Tornado Cash, Flashbots, and regulatory equivalence

Public, permissionless blockchains are often framed as caught between the requirements of full legal compliance (which recentralizes control) and the strategy of regulatory avoidance (which undermines legitimacy). This chapter argues that this binary is false, identifying an alternative approach. Building on the polycentric nature of blockchain governance, we develop the notion of regulatory equivalence: technical and organizational arrangements that realize the public policy objectives of law, such as preventing the flow of illicit finance, without reproducing the monocentric control that blockchain systems are designed to resist. Using Ethereum as our empirical setting, we contrast Tornado Cash’s privacy-by-design system and regulatory avoidance strategy with the filtering tool in Flashbots’ MEV infrastructure, a modular, market-mediated response that operationalizes policy goals through code. Through these cases, this chapter shows how endogenous governance (developers, validators, relays, and users) interacts with exogenous governance (courts, regulators) to navigate conflicts between the “rule of code” and the rule of law. It identifies three design principles that enable regulatory equivalence—protocol neutrality, technological guarantees, and competitive pluralism—and outlines conditions under which they preserve polycentricity while adhering to public values. The chapter contributes an alternative framework for policymakers and protocol designers seeking workable interfaces between blockchain ecosystems and public governance, grounded in detailed case analysis and attentiveness to both blockchain-native values and regulatory requirements.