But the sanctions targeting Tornado Cash are new. Tornado Cash is known as a mixer, obfuscating the source of digital assets by merging them together before users withdraw them. It exists as software code on a decentralized network of computers spanning the globe, and its authors have written it in such a way that even they cannot modify it. Crypto industry executives say they aren’t sure what they must do to stay on the right side of the law.
“More than anything else right now, we’re an industry that needs guidance,” said Ari Redbord, a former Treasury official now with TRM Labs, which provides crypto companies with tools to monitor fraud and financial crime. .
A crypto company that has drawn attention from US regulators and law enforcement in the past, Tether, may be in violation of new Treasury rules. According to a Washington Post analysis of data by Dune Analytics, a crypto intelligence firm, Tether is not blacklisting accounts linked to Tornado Cash.
So far, the US government has not taken action. “Tether has not been contacted by US officials or law enforcement with a request” to freeze Tornado Cash transactions, Tether’s chief technology officer Paolo Ardoino said in a statement, adding that the company “normally complies with requests from US authorities”. .
Tether launches the world’s largest stablecoin, a dollar-pegged token that helps form the lifeblood of the global crypto economy. Investors use it to buy and sell other digital assets and as collateral for certain trades.
It is not clear whether Tether is legally bound to fall in line with Treasury sanctions. The Hong Kong-based company suggests that’s not the case because it “does not operate in the United States or onboard American customers,” Ardoino said. But he said the company views the Treasury sanctions “as part of its world-class compliance program.”
In others timethe leaders of Tether HAVE claiming the company is overseen by the Treasury as it is registered with the Financial Crimes Enforcement Network, an office of the department that fights illicit finance.
When asked if Treasury considers Tether to be in violation of Tornado Cash sanctions, the department declined to comment.
Sanctions experts said the issue is controversial. The restrictions “generally apply to all US citizens or corporations, or any person or organization in or doing business in the United States, or any transaction affecting the United States,” Scott Anderson, a former adviser to the Department of State now with the nonpartisan Brookings Institution. said in an email. “I don’t know if Tether falls into this field or not. But if there is a possibility that they (or their employees) could, non-compliance could present real legal risk.”
A former senior official for the Treasury’s Office of Foreign Assets Control (OFAC), which enforces sanctions, said Tether is treading on dangerous ground.
“It’s never a very good idea to test OFAC. Right now, it’s a particularly bad time for any crypto-related company to do that,” said the former official, who spoke on condition of anonymity because they were not authorized to speak publicly. “It seems that’s what they’re doing.”
Tether’s response, and the uncertainty surrounding it, highlights the firestorm the Treasury has unleashed with its latest bid to curb the criminal abuse of digital assets.
Cryptocurrency developers have long been divided on whether they are simply working on an innovative financial technology or are part of a clear political attempt to create a shadow financial system beyond government control.
But crypto executives largely agree that Treasury overreached in its Aug. 8 announcement against Tornado Cash, which they characterized as an unprecedented targeting of computer code, rather than a person or entity that typically receives sanctions. Some argue that the sanctions may be unconstitutional — and could be an attempt to launch a broader attack on the privacy protections provided by their technology. Many are trying to determine how to obey and resist the decision.
A Treasury spokesman noted the urgent need for the department to take action, noting in a statement that Tornado Cash “has been used to launder billions of dollars for criminals and other illegal actors.”
The Treasury Department is working with industry representatives “to monitor the effects of this action and issue guidance as necessary,” said the spokesman, who spoke on condition of anonymity because of the sensitive nature of the sanctions issue.
Roman Semenov, a co-founder of Tornado Cash, wrote in a direct message on Twitter to The Post that the sanctions “will definitely deter a lot of people” from using the service.
Some Tornado Cash users can innocently deposit legitimately earned cryptocurrency and withdraw it to make untraceable charitable donations – like ethereum co-founder Vitalik Buterin claiming to have done to contribute to Ukraine’s war effort. Depending on the time, some user transactions may have helped North Korean-linked hackers cover their tracks. In June and July, 41 percent of the funds that went through the service were related to hacks and other thefts, according to TRM Labs, a blockchain analytics firm.
Tether has a history of racking up penalties from regulators. In 2021, it paid $18.5 million to settle allegations from the New York Attorney General’s office that it lied about the composition of the assets backing its stablecoin, known as USDT. The company paid another $41 million later that year to settle similar charges from the Commodity Futures Trading Commission.
And it has neglected to comply with US sanctions against a crypto program before. A Post analysis in April found that Tether continued to allow transactions with accounts allegedly belonging to Chatex, a Moscow-based digital asset exchange that the Treasury sanctioned last year. Since Tornado Cash was sanctioned this month, $5,000 USDT has been deposited into the mixer, according to The Post’s analysis.
Tether’s closest competitor, Circle Internet Financial, has taken a different approach. A day after the sanctions were announced, the US-based company said it complied by freezing $75,000 of its stablecoin, USD Coin, in Tornado Cash wallets and blocking transactions with blacklisted accounts.
However, District chief executive Jeremy Allaire criticized the Treasury’s decision, writing on Twitter that it “crossed a great threshold in the history of the Internet”. He said the sanctions raised “tremendous questions about privacy and security” and would invite “tougher enforcement action if we don’t act now.”
The Coin Hub, a crypto think tank and advocacy group, went further. The organization said it is weighing a legal challenge. The decision “potentially violates constitutional rights to due process and free speech,” Jerry Brito and Peter Van Valkenburgh of the Coin Center wrote in a blog post last week, adding that Treasury “failed to act adequately to mitigate the foreseeable impact his action would have on the innocent. Americans.” The coin center declined to comment further.
Tornado Cash is set to run automatically and cannot be changed or closed. “It’s like yelling at a vending machine,” said Michael Mosier, a former head of the Treasury’s Financial Crimes Enforcement Network who is now general counsel to crypto privacy firm Espresso Systems. “It’s not the way to make a behavioral change, so it won’t serve the national security goals for which the system was created.”
Tornado Cash has already seen a rapid decline in the crypto it is processing since the sanctions took effect. According to data from Dune Analytics, daily deposits into the program have dropped from about $7 million in ethereum in the first week of August to about $2 million since the mixer was sanctioned. As traffic to the mixer dries up, crypto analysts say, the tool becomes less useful to illegal actors, who need a large pool of crypto to effectively obfuscate the assets they send through it.
