Another spin on crypto sanctions – POLITICO
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Tornado Cash has now entered the Washington spin cycle.
The Treasury Department’s August 8 sanctioning of the decentralized mingling service, which is used to hide crypto transactions on the Ethereum blockchain, quickly exploded into a full-bore crisis for decentralized finance developers, privacy advocates and other pro-crypto groups who said it could be a alerts about future actions.
Two weeks later, congressional leaders begin to take notice.
“OFAC — they don’t know how to handle this thing,” said Rep. Tom Emmer (R-Minn.), who sent a letter on Tuesday to Secretary Janet Yellen demanding more information about the Treasury’s Office of Foreign Assets Controls (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 the bad actors.”
Founded in 2019, Tornado Cash fell out of 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 identified Blender.io as a washing machine for other Russian and North Korean-backed criminal actors.
But while few pushed back on sanctions against Blender.io — a centralized entity that allegedly stored users’ crypto before spitting it back out — Treasury’s blacklisting of Tornado Cash targeted open-source software that its developers say they no longer control.
Functionally, Tornados is now an anonymizing perpetual motion machine: “Decentralized and unstoppable, as long as Ethereum doesn’t change or take down,” the founders wrote in a May 2020 blog post. Tornado co-founder Roman Semenov emphasized this point as fears grew about the use of crypto to avoid sanctions – especially after Russia’s 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 monitor upgrades, are no different than those that have been applied to other crypto entities over the years.
DeFi proponents and crypto advocacy groups say this simplifies matters, 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. (In particular, 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 otherwise traceable transactions on Ethereum’s public ledger. Blockchain analytics 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 nearly 30 percent of the volume was either stolen or sent there by groups that were eventually sanctioned.
And therein lies the rub. The privacy tools that benefit regular crypto traders can also be used by criminals. Criminals took mass notice.
Tornado’s decentralized code “didn’t quite 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.
“Authorities have taken – and will continue to take – a very strong interest in the AML-KYC element that makes our markets sound,” she said. “More will be done in that area.”
That said, determining how the authorities proceed 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 over my skis if I pretended to know the ins and outs of what OFAC is doing there,” Stump added.
IT’S WEDNESDAY — And the bars in Jackson Hole are preparing for what’s to come. Send tips, story ideas and feedback to [email protected], [email protected] or [email protected].
Data for durable goods released at 08.30 … Pending housing sales data released at 10.00. The bipartisan policy center is holding a virtual discussion on blockchain and crypto policy at 2 p.m
WHITE HOUSE BUDGET UPDATE — From Kate: “The Biden administration is projecting a record decline in budget deficits this year as federal tax revenue beats expectations and spending on pandemic relief programs slows. The budget gap for fiscal year 2022 will be an estimated $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 midyear budget update released Tuesday. It 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 dampen the economy.”
ALERT ‘MUDGE’ HITS TWITTER AMID MUSK SEARCH — WaPo’s Joseph Menn, Elizabeth Dwoskin and Cat Zakrzewski: “Twitter executives lied to federal regulators and the company’s own board about ‘extreme, serious deficiencies’ in its defenses against hackers as well as its meager efforts to fight spam, according to an explosive whistleblower complaint from the former head of security.”
From POLITICO’s Rebecca Kern: “The whistleblower complaint could complicate the lawsuit filed against Twitter [Elon] Muskfor tried to break the agreement to buy the company for 44 billion dollars. Musk has claimed that the company has underestimated the number of spam and bots on the platform. [Peiter] Zatko said in the complaint that current Twitter CEO Parag Agrawal “lied” when he tweeted that the company was encouraged to find and remove spam whenever possible.”
ICYMI: PENN WHARTON BUDGETING MODEL ON STUDENT DEBT— Forgiving federal college student loan debt — 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 released Tuesday by the Penn Wharton Budget Model. And most of the benefit would go to borrowers in the top 60 percent of the income distribution.
GAS PRICES SLIP GOP GUNS – Bloomberg’s Ari Natter: “Republicans who have used skyrocketing gas prices as a potent political tool to beat Democrats in the run-up to the midterm elections have a problem: Steadily falling prices at the pump.”
BAD TIMING — NYT’s Jim Tankersley: Pandemic aid programs helped the US economy recover far faster than many economists expected, but they have run their course as prices rise at the fastest pace in 40 years. … While there is still disagreement about the extent to which the bailout fed inflation, almost no one, in Washington or on the front lines helping vulnerable people across the country, expects another round of federal aid, even as the economy tips into a recession.”
ADP REPORT REVAMP — POLITICO’s Eleanor Mueller: “Payroll giant ADP is turning its closely watched forecasts for the federal government’s monthly jobs report into a comprehensive and independent analysis of the labor market that draws on the breadth of its own data … Because it’s based on wage data — what [ADP Chief Economist Nela] Richardson called “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 to the slowest pace since early 2016, extending a months-long deterioration in the housing market driven by high borrowing costs and declining demand.”
GOOGLE “DENOMINTOR EFFECT” — Bloomberg’s Janet Lorin: “Endowments lost a median 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 assets of more than $500 million – fared significantly better, with a small gain of 0.9%.”
IS IT BOB PETTIT? BECAUSE I SEE SOME ST. LOUIS HAWKS — Reuters: “The boards of the Minneapolis and St. Louis Federal Reserve banks voted in mid-July to raise by a full percentage point the interest rate charged to commercial banks for emergency loans, minutes from their discount rate meetings showed on Tuesday.”
THE ENERGY FROM THE CROWD — WSJ’s Karen Langley: “The summer’s market rally has begun to lure investors back into mutual funds. Investors allocated a net $11.7 billion to mutual funds and exchange-traded funds during the two-week period ended last Wednesday, according to Refinitiv Lipper data.
REST IN PEACE — WSJ’s Gregory Zuckerman: “Julian H. Robertson Jr., a pioneering hedge fund investor, has died at age 90.”
FLATLINERS — Has interest in crypto stagnated? Last September, when interest in digital assets like Bitcoin and Ether was nearing its peak, about 16 percent of Americans polled by the Pew Research Center said they had invested, traded or used cryptocurrencies. In an updated survey taken last month, the share of Americans who said they had used crypto was unchanged. “This lack of overall change comes despite strong attention to crypto in the news,” Pew’s Michelle Faverio and Navid Massarat wrote in a research note published Tuesday.
Special, of those who said they had dabbled in digital assets, slightly less than half said their investments performed worse than expected.
CELSIUS OPPOSES — Bloomberg’s Jeremy Hill: “Celsius, which filed for bankruptcy last month after freezing customer funds, claims Keyfi Inc. and founder Jason Stone lied about its investment ability and was incompetent to manage 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 potentially hundreds of millions of dollars in wages.”
Commercial activities in Europe and Japan fell in August, according to new surveys, pointing to a sharp slowdown in global economic growth as higher prices dampen consumer demand and the war in Ukraine disrupts supply chains. — WSJ’s Paul Hannon
Russia’s economy has avoided the collapse many predicted after Moscow sent its forces into Ukraine six months ago, with higher prices for oil exports cushioning the impact of Western sanctions, but difficulties are emerging for some Russians. — Reuters’ Andrey Ostrukh
Australia, credited with spreading the avocado on toast around the world, crunching under a mountain of the green, pear-shaped fruit. — WSJ’s Mike Cherney and Allison Prang
