The U.S. government’s latest effort to crack down on the illegal use of cryptocurrency by rogue foreign regimes and criminals is facing resistance from the industry itself, including one of its largest and most influential players.
Tether, a top crypto company, is defying US sanctions against services that hid stolen assets
But the sanctions targeting Tornado Cash are new. Tornado Cash is known as a mixer, which hides the source of digital assets by merging them before users withdraw them. It exists as software code on a decentralized, worldwide network of computers, and its authors wrote it in such a way that even they cannot edit it. Crypto industry leaders say they are not sure what they must do to stay on the right side of the law.
“More than anything right now, we’re an industry that needs guidance,” said Ari Redbord, a former Treasury secretary now with TRM Labs, which provides crypto companies with tools to monitor fraud and financial crime.
One crypto company that has attracted scrutiny from US regulators and law enforcement in the past, Tether, may be in violation of the Treasury’s new rules. According to a Washington Post analysis of data from Dune Analytics, a crypto-intelligence firm, Tether does not blacklist 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 issues the world’s largest stablecoin, a token pegged to the value of the dollar 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 the Treasury’s sanctions. The Hong Kong-based company suggests it is not, because it “does not operate in the United States or onboard American persons as customers,” Ardoino said. But he said the company is considering sanctions from the Treasury Department “as part of its top-notch compliance program.”
On others timesTether Leaders have claimed the company is monitored by the Treasury Department since it is registered with the Financial Crimes Enforcement Network, an agency within the department that fights illegal finance.
When asked if the Treasury Department considers Tether to be in violation of the Tornado Cash sanctions, the department declined to comment.
Sanctions experts said the case is debatable. The restrictions “generally apply to any U.S. citizen or corporation, or any person or organization in or doing business in the United States, or transactions involving the United States,” Scott Anderson, a former State Department adviser now at the nonpartisan Brookings Institution, said in a e-mail. “I don’t know if Tether falls within this scope or not. However, if there is a chance that they (or their employees) can, non-compliance can pose real legal risks.”
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 is a particularly bad time for any crypto-related company to do so,” the former official said. “Looks like that’s what they’re doing.”
Tether’s response, and the ambiguity surrounding it, highlights the firestorm the Treasury has unleashed with its latest attempt to prevent the criminal misuse of digital assets.
Cryptocurrency developers have long been divided as to whether they are only working with an innovative financial technology or are part of it an explicit political attempt to create a shadow financial system beyond the reach of government control.
But crypto leaders largely agree that the Treasury overreached with its Aug. 8 announcement against Tornado Cash, which they refer to as an unprecedented targeting of computer code, rather than a person or entity that is usually on the receiving end of sanctions. Some argue the sanctions could be unconstitutional — and could be an attempt to open a broader assault on the privacy afforded by their technology. Many are trying to decide how to follow and oppose the decision.
A Treasury Department spokesperson pointed to 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 impact of this action and provide guidance as appropriate,” the spokesperson said.
Roman Semenov, a Tornado Cash co-founder, 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 may innocently deposit legally acquired cryptocurrency and withdraw it to make untraceable charitable donations – like Ethereum co-founder Vitalik Buterin claimed to have done to contribute to Ukraine’s war effort. Depending on the time, some users’ transactions may have helped North Korean-affiliated hackers cover their tracks. In June and July, 41 percent of funds passing through the service were linked to hacks and other thefts, according to TRM Labs, a blockchain analytics firm.
Tether has a history of taking penalties from regulators. In 2021, it paid $18.5 million to settle charges by the New York state attorney general that it lied about the composition of the assets backing its stablecoin, known as USDT. The company paid an additional $41 million later that year to settle similar claims by the Commodity Futures Trading Commission.
And it has failed to comply with US sanctions against a crypto program in the past. A postal 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 Department sanctioned last year. Since Tornado Cash sanctioned this month, $5,000 worth of USDT has been put into the mixer, according to The Post’s analysis.
Tether’s closest competitor, Circle Internet Financial, has taken a different approach. The day after the sanctions were announced, the US-based company said it was moving to comply by freezing $75,000 worth of its stablecoin, USD Coin, in Tornado Cash wallets and blocking transactions with the blacklisted accounts.
Nevertheless, Circle CEO Jeremy Allaire criticized Treasury’s decision, writing on Twitter that it “crossed a major threshold in the history of the internet.” He said the sanctions raised “extraordinary privacy and security issues” and would invite “more legal action if we don’t take action now.”
Coin Center, 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,” Coin Center’s Jerry Brito and Peter Van Valkenburgh wrote in a blog post last week, adding that the Treasury Department “has not acted adequately to mitigate the foreseeable impact the action will have on the innocent.” Americans.” Coin Center declined to comment further.
Tornado Cash is set to work automatically and cannot be changed or turned off. “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 for crypto privacy firm Espresso Systems. “That’s not the way to make a behavioral change, so it’s not going to effect the national security goals the system was set up to achieve.”
Tornado Cash has already seen a sharp drop in the crypto it processes since the sanctions took effect. Daily deposits to the program have fallen from about $7 million worth of ethereum in the first week of August to about $2 million since the mixer was sanctioned, according to data from Dune Analytics. As traffic to the mixer dries up, cryptoanalysts say, the tool becomes less useful to illegal actors, who need a large pool of crypto to effectively hide the assets they send through it.
