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Sanctions Against Crypto Mixer Raise Broader Compliance Fears

It’s not just the libertarians who are concerned about the implications of the U.S. blacklisting a crypto mixing site allegedly used by North Korean hackers.

It’s the people involved in sending cryptocurrency from one wallet to another that may have reason to be concerned with complying with the sanctions the U.S. Treasury Department placed on the Tornado Cash cryptocurrency mixing service last week.

See also: With Tornado Cash Sanctions, Feds Seek to Lift Crypto’s Veil of Anonymity

For all crypto’s founding bloviations about Bitcoin becoming a peer-to-peer payments tool that bypasses intermediaries, it actually takes a whole lot of intermediaries to make the system work — exchanges, stablecoin issuers, digital wallet makers, crypto custody firms and even crypto coders who may be on the front lines of enforcing the blacklist that the Treasury Department’s Office of Foreign Assets Control (OFAC) imposed last week.

Like other mixing services, Tornado Cash deliberately obscures the origin of cryptocurrencies and stablecoins.

Read more: Crypto Crime Series: When Privacy Counts, Crypto Users Turn to Mixing Services

Exchanges like Coinbase have blocked transactions to Tornado Cash and the 44 USD Coin and ether addresses OFAC alleges are connected with North Korean hackers — who the agency says have laundered $455 million through Tornado Cash over the years.

Cointelegraph noted that there is an estimated $437 million in Tornado Cash addresses, which firms like exchanges must block and asset issuers like USDC’s Circle and USDT’s Tether must freeze.

USD Coin issuer Circle froze about 75,000 of its dollar-pegged USDC stablecoins, which nearly doubled the number of banned addresses to 82, crypto intelligence firm Dune Analytics reported.

And because sanctions are unforgiving about the intent of violations, firms that are involved in crypto transactions at any level have reason to be worried. Violating OFAC sanctions comes with penalties of up to 20 years in prison and fines of up to $1 million.

The Tool or the User?

But the concern goes deeper in light of the arrest of an unnamed Tornado Cash developer in the Netherlands a few days after the U.S. sanctions were announced, as they represent the first time anything but a person or company has been sanctioned.

A decentralized finance (DeFi) project, Tornado Cash is neither owned nor run by anyone, and the only people supporting it are programmers writing the open-source code that is the mixing service.

See also: Tornado Cash Arrest Signals Gathering AML Storm for DeFi Developers

That last part is something that has civil rights groups concerned, and not just those in crypto. It is something that should worry anyone involved in any project that involves crypto transactions. If the tool or the rail used to move money is sanctioned, rather than the person or legal “person” — a company — actively involved in transferring the value at a specific moment, the compliance game gets a lot harder.

The Electronic Freedom Foundation, a globally respected organization focused on defending civil liberties in the digital world, said it is “deeply concerned” by the sanctioning of what amounts to written computer code.

EFF is deeply concerned that the U.S. Treasury Department has included an open source computer project, Tornado Cash, on its list of sanctioned individuals. Tornado Cash is an open source software project and website that published a decentralized cryptocurrency mixer.

— EFF (@EFF) August 15, 2022

OFAC has broken new ground by placing “an open source computer project” like Tornado Cash on a sanctions list, the EFF tweeted. “Code has long been recognized as speech, so there are clear First Amendment implications whenever the government inhibits the publication of computer code on a public website.”

If a developer can be arrested for writing computer code, which the law has for decades viewed as protected speech, in effect anyone involved with a crypto project that supports sending or receiving payments can be seen as a potential sanctions violator — they are effectively responsible for bad actors’ future actions.

For Good and Ill

In some ways, it’s a similar concern to the one that arose when a section of the Biden administration’s $1 trillion infrastructure act contained a section that could be interpreted to mean that coders and the miners or validators who secure and add data to blockchains could be responsible for collecting know-your-customer (KYC) information they have no access to.

Read more: Crypto’s Influence Shows as Treasury Promises Protection for Miners, Stakers

That was a provision the vast majority of congress expressed a desire to change — although not at the risk of derailing the infrastructure bill — because it made the toolmakers (so to speak) responsible for how they were used.

“I’ve seen a lot of discussion essentially saying, ‘Tornado Cash was used by criminals and hackers, so it deserves to be shut down,’” Seth Hertlein, global head of policy for digital wallet maker Ledger, said on a Twitter thread.

“If Treasury had sanctioned the criminals and hackers that used Tornado Cash, no problem. But, Tornado Cash is open-source code, meaning it’s not owned by anyone and is freely available to everyone,” he said. “We enjoy the benefits of public goods and infrastructure every day: the internet, our wireless networks, our money, the banking system, our roads and highways, transportation infrastructure. Guess what? Criminals use these everyday, too.”

And, mixing services have uses even more benign than law-abiding people protecting their privacy, supporters say: They can be used to fight — or at least defend against — oppression

It’s a point Ethereum creator Vitalik Buterin made after the Tornado Cash sanctions were announced: that he had in the past used the mixing service to send donations in ether to Ukraine.

Of course, the crypto community being what it is, a large group of VIPs and celebrities’ wallet addresses — including Jimmy Fallon, comedian Dave Chappelle, sneaker maker Puma and of course a fund supporting Ukraine —received small transfers of ether someone sent from Tornado Cash, CoinDesk noted on Aug. 9.

The point was that sanctions apply to anyone doing business in any way involved with a sanctioned individual or wallet address, that the way blockchain works makes it impossible for someone to refuse a transaction sent to their wallet.

A crypto payment is, quite literally, an offer they can’t refuse.


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