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Tornado Cash has now entered the Washington spin cycle.
The Treasury Department’s August 8 sanctioning of the decentralized hashing service, which is used to obfuscate crypto transactions on the Ethereum blockchain, quickly erupted into a full-blown crisis for decentralized finance developers, privacy advocates and advocacy groups. other pro-cryptos who said it could be a harbinger of future shocks.
Two weeks later, congressional leaders are beginning to take notice.
“OFAC — they don’t know how to deal with this,” said Rep. Tom Emmer (R-Minn.), who sent a letter Tuesday Secretary Janet Yellen requesting more information about the Treasury Office of Foreign Assets Control (OFAC) case against Tornado. “So they’re going to err — it seems — on the side of potentially infringing on the privacy and free speech of law-abiding Americans. And I think that’s wrong.”
Emmer, who also chairs the National Republican Congressional Committee, said: “OFAC needs to figure out how to get some other tools to deal with bad actors.”
Founded in 2019, Tornado Cash fell from the Treasury’s good graces after North Korean hackers allegedly used the protocol to launder hundreds of millions of dollars in stolen digital assets. This was not the first time OFAC targeted blending services, having previously identified Blender.io as a laundering machine for other Russian and North Korean-backed criminal actors.
But while few balked at sanctions against Blender.io — a centralized entity that allegedly took control of users’ crypto before spitting it out — Treasury’s blacklisting of Tornado Cash targeted open-source software that its developers say they no longer control it.
Functionally, Tornado is now a perpetual motion anonymizing machine: “Decentralized and unstoppable, as long as Ethereum is not altered or removed,” the founders wrote in a May 2020 blog post. Tornado co-founder Roman Semenov emphasized this point as fears grew over the use of crypto to evade sanctions – especially after the Russian invasion of Ukraine. “There’s not much we can do” to limit transactions on the protocol, he told Bloomberg in March.
Treasury has said that the sanctions targeting Tornado Cash, including the entities that maintain the protocol and oversee improvements, are no different from those that have been applied to other cryptographic entities over the years.
Proponents of DeFi and crypto advocacy groups say this oversimplifies the issue and that blacklisting code — rather than a specific business or individuals — constitutes an attack on free speech and due process.
Coin Center, a crypto-focused think tank in Washington, has already said it is exploring a legal challenge on due process grounds. (Notably, as POLITICO’s Ben Schreckinger pointed out last week, there is precedent for First Amendment protections that apply to the publication of cryptographic code.)
To be sure, Tornado can and has been used by legitimate actors to privatize transactions otherwise traceable to Ethereum’s public ledger. Blockchain analysis firm Chainalysis reported earlier this month that roughly two-thirds of the crypto that has been routed through the service came from centralized exchanges or DeFi platforms.
But the same report noted that almost 30 percent of that volume was either stolen or sent there by groups that were eventually sanctioned.
And therein lies the rub. Privacy tools that benefit normal crypto traders can also be used by criminals. Criminals took notice en masse.
Tornado’s decentralized code “didn’t fit” with anti-money laundering and know-your-customer rules, said former CFTC Commissioner Dawn Stump, who was recently hired as a strategic adviser to blockchain analytics firm Solidus Labs.
“The authorities have taken – and will continue to take – a really big interest in that AML-KYC element that makes our markets solid,” she said. “More will be done in that space.”
That said, determining how authorities move forward with enforcement actions or sanctions against ethereal pieces of software no longer controlled by a core group of developers is a much more difficult question.
“I’d be well on my skis if I pretended to know the ins and outs of what OFAC is doing there,” Stump added.
IT’S WEDNESDAY — And the irons in Jackson Hole are preparing for what’s to come. Send tips, story ideas and comments to [email protected], [email protected] or [email protected].
Durable goods data released at 8:30 a.m. … Pending home sales data released at 10 a.m. … The Bipartisan Policy Center holds a virtual discussion on blockchain and crypto policy at 2 p.m. :00
White House BUDGET UPDATE — From Kate: “The Biden administration is projecting a record decline in the budget deficit this year as federal tax revenue beats expectations and spending on pandemic relief programs fades. The budget gap for fiscal year 2022 will be estimated at $1 trillion – 1.7 trillion less than last year’s deficit and about $400 billion less than officials projected in March, according to the White House’s budget update released Tuesday. That would be the lowest annual deficit since 2019, before the pandemic plunged the US into a deep recession and prompted a wave of government spending to calm the economy.”
‘MUDGE’ INFORMATION ON TWITTER Amid Musk’s Lawsuit — WaPo’s Joseph Menn, Elizabeth Dwoskin and Cat Zakrzewski: “Twitter executives misled federal regulators and the company’s own board of directors about “extreme, egregious deficiencies” in its defenses against hackers, as well as its scant efforts to to combat spam, according to an explosive whistleblower complaint from her former security chief.”
From POLITICO’s Rebecca Kern: “The whistleblower’s complaint could complicate the lawsuit against which Twitter filed [Elon] Musk is trying to scuttle his deal to buy the company for $44 billion. Musk has claimed that the company has greatly underestimated the number of spam and bots on the platform. [Peiter] Zatko said in the complaint that current Twitter CEO Parag Agrawal was ‘lied’ when he tweeted that the company was encouraged to find and remove spam as much as possible.
ICYMI: THE PENN WHARTON BUDGETING MODEL ON STUDENT DEBT– Federal student loan debt forgiveness — up to $10,000 for borrowers with incomes below $125,000 a year — would cost the government $300 billion over the next decade, according to an analysis by Penn Wharton’s Budget Model published on Tuesday. And most of the benefit would go to borrowers in the top 60 percent of the income distribution.
FALLING GAS PRICES SHOOT GOP ARMS —Bloomberg’s Ari Natter: “Republicans who have used skyrocketing gas prices as a powerful political tool to bash Democrats in the run-up to the midterm elections have a problem: the continued decline in prices.
BAD MOMENT — NYT’s Jim Tankersley: “Pandemic aid programs helped the US economy recover much faster than many economists expected, but they have run their course as prices rise at the fastest pace in 40 years. … While the degree to which the bailout fueled inflation remains a matter of dispute, almost no one, in Washington or on the front lines of helping vulnerable people across the country, expects another round of federal aid even if the economy slips into a recession .”
ADP REPORT REVAMP — POLITICO’s Eleanor Mueller: “Payroll giant ADP is transforming its closely watched forecasts of the federal government’s monthly jobs report into a broad, independent analysis of the labor market that draws on the breadth of its own data … Because it is based on the payroll given – what [ADP Chief Economist Nela] Richardson called it the largest real-time crowdsourcing in the U.S. — instead of the monthly establishment survey, the firm says it can be more up-to-date and, as a result, more useful than the Bureau of Labor Statistics’ release. “
NEW HOME SALE SLIDE — Bloomberg’s Reade Pickert: “Sales of new U.S. homes fell in July for the sixth time this year at the slowest pace since early 2016, extending a months-long deterioration in the housing market fueled by the cost of high levels of borrowing and a withdrawal of demand”.
GOOGLE “THE DENOMINATOR EFFECT” — Janet Lorin of Bloomberg: “Endowments lost an average of 10.2% before fees for the 12 months through June, according to data to be released Tuesday by the Wilshire Trust Universe Comparison Service. The largest funds – those with more than $500 million in assets – fared significantly better, with a slight gain of 0.9%.
IS IT BOB PETTIT? BECAUSE SEE SOME ST. LOUIS HAWKS — Reuters: “Boards of directors of banks of Minneapolis and St. Tuesday.”
CROWD ENERGY — WSJ’s Karen Langley: “The summer market rally is starting to lure investors back into stock funds. Investors poured a net $11.7 billion into equity mutual funds and exchange-traded funds during the two-week period that ended last Wednesday, according to data from Refinitiv Lipper.
REST IN PEACE — WSJ’s Gregory Zuckerman: “Julian H. Robertson Jr., a pioneering hedge fund investor, has died at 90.”
FLATLINES – Has interest in cryptocurrencies stalled? Last September, when interest in digital assets like Bitcoin and Ether was nearing its peak, about 16 percent of Americans surveyed by the Pew Research Center said they had invested in, traded in, or used cryptocurrencies. In an updated poll taken last month, the percentage of Americans who said they had used crypto was unchanged. “This lack of overall change comes despite heavy attention to crypto in the news,” Pew’s Michelle Faverio and Navid Massarat wrote in a research note published Tuesday.
In particular, of those who said they had dabbled in digital assets, just under half said their investments performed worse than expected.
THE OBJECTIONS OF CELSIUS – Bloomberg’s Jeremy Hill: “Celsius, which filed for bankruptcy last month after freezing customer assets, claims Keyfi Inc. and founder Jason Stone lied about his investment skills and were incompetent in managing Celsius assets. The crypto lender also accused Stone of outright theft… The charges come after Stone sued Celsius last month, accusing the crypto lender of fraud and cheating him out of hundreds of millions of dollars in pay.”
Business activity in Europe and Japan fell in August, according to new surveys, pointing to a sharp slowdown in global economic growth as higher prices weaken consumer demand and the war in Ukraine disrupts supply chains. – WSJ’s Paul Hannon
Russia’s economy has been avoided The thaw predicted by many after Moscow sent its forces into Ukraine six months ago, with higher prices for its oil exports softening the impact of Western sanctions, but difficulties are emerging for some Russians. — Andrey Ostrukh of Reuters
Australia, credited with spreading the avocado on toast around the world, it’s crunching under a mountain of green, pear-shaped fruit. – WSJ’s Mike Cherney and Allison Prang
