Have US crypto sanctions gone too far?
Photo: Bloomberg/Getty Images
There is something alluring about North Korea for those on the fringes of the Western crypto world. Earlier this year, hacker Virgil Griffith was sentenced to five years for helping Kim Jong-Un’s government evade sanctions, while Tether, the issuer of the third largest cryptocurrency, has decided to fight for the right to send money to related entities . Now there is a lawsuit against the US Treasury Department as well as Secretary Janet Yellen over the department’s sanctions, which are intended to target North Korea’s army of hackers but are potentially so sweeping as to verge on Orwellian for their potential to stifle free speech.
On Wednesday, David Hoffman, a crypto evangelist and podcaster, and the Coin Center, an industry think tank, filed suit against the Treasury Department over sanctions it issued earlier this year against Tornado Cash, a tool that anonymizes cryptocurrency transactions. According to the Treasury’s Office of Foreign Assets Control, the department’s sanctions arm, the blacklist is a response to the Lazarus Group, the North Korean hacker army it claims stole and laundered about $500 million. The problem, however, is that Tornado Cash is not a company or a person – it is code that lives on the ethereum blockchain, and there is no way for anyone to control or destroy the protocol. Since Tornado Cash is not an entity, it cannot appeal. That’s up to people like Hoffman, who claims he could be forced to certify every year that he’s not a criminal — not because he’s used it or has a connection to North Korea, but because he once got someone to to send him money with Tornado Cash.
Tornado Cash is a kind of intermediary service, and the way it works is simple: someone sends digital currency to a specific Tornado wallet, which then stores the money; afterwards, the central Tornado wallet can send money back to the sender, or to someone else, in smaller amounts and at different intervals, making it harder to trace. That’s basically it. Although US Secretary of State Antony Blinken had previously accused Tornado Cash of being associated with North Korea, he later backtracked, claiming only that it had been used by the Lazarus Group to help it launder money.
The consequences of the sanctions are already being felt all over the world. In April, developer Alex Pertsev, who worked on Tornado Cash, was arrested in the Netherlands. (His wife, Xenia, told me today that “he’s fine, but still in prison.”) Still, it’s unclear whether the sanctions have had any effect on North Korea — and they appear to have only emboldened the most ideological corners of the crypto community. For Kim’s government, the appeal is obvious: Here is a form of international currency that is extremely hackable and that until last year had exploded in value during the pandemic, providing an economic lifeline to a country otherwise isolated from the rest of the world. For crypto die-hards, the dire living conditions and nuclear brinkmanship tend to be abstracted away in favor of its status as a use case, as if it were a Harvard Business School problem designed to fix. If you believe in the central idealism of crypto – that it’s an economic way to get around governments, central banks and other oppressive entities – then there’s no more extreme environment to prove your technology works than in this authoritarian regime.
OFAC – which is named as a defendant – is key to the US clampdown on Russia since the invasion of Ukraine, for example, or in the isolation of states such as Iran, Cuba and Venezuela. But the Tornado Cash sanctions, according to one expert I spoke to, are a new form of US blacklisting since they go after a specific piece of technology that isn’t necessarily malicious. Roman Semenov, one of the code’s creators, says there is no way to stop Tornado Cash’s anonymization features since it operates on ethereum, the world’s second largest cryptocurrency, and anyone can use it.
The lawsuit by Hoffman and Coin Center shows that the Treasury Department is overstepping its authority to punish a piece of technology because of its users. “Making it a crime for Americans to use Tornado Cash because the Lazarus Group used Tornado Cash to promote its illegal activities is like making it a crime for Americans to use email because the Lazarus Group used email to promote their illegal activities,” according to the suit. “Sometimes good tools are used by bad people.” Hoffman specifically claims that one facet of the sanctions, which punishes anyone who receives money from the service, is also hurting him due to a tactic known as “dusting”, where someone sent him a small amount of crypto through Tornado Cash. It’s unclear why he was sent the money — maybe it was from a person concerned about privacy, maybe it was a troll — but Hoffman says he has to prove his innocence every year because of it. This will apply to celebrities such as Jimmy Fallon and Shaquille O’Neal, who have also been sent money through the service, says Hoffman. “In other words, the Biden administration has empowered any bad actor to easily subject a law-abiding American to potential civil and criminal liability and burdensome reporting obligations, through no fault of the American’s own,” according to the lawsuit.
