Crypto Pushes Back On Tornado Cash Ban From US Treasury Department

The Tornado Cash Storm

Crypto has pushed hard against the Treasury Department’s Tornado Cash crackdown, which the industry largely condemned as a sweeping move that makes no sense. Not only is the blanket ban controversial, but supporters say imposing a ban on the widely used software would be impractical, if not impossible.

The counteroffensive may be working: The federal regulator appears ready to tone down its anti-Tornado Cash campaign.

Tornado Cash isn’t just for criminals. But that’s what the new rule announced by the Office of Foreign Assets Control implied, citing the open source software tool’s role in money laundering and other crimes.

• But the OFAC rule is too broad. The regulator strongly implied that any crypto transaction going through Tornado Cash is inherently illegal – which is simply insane, crypto advocates claim.
• Yes, criminals use Tornado Cash, but so do many ordinary, law-abiding citizens, according to crypto advocates. And in some cases, they may not even be aware that their assets “touched” Tornado Cash.
• To emphasize this point, Tornado Cash users protested the OFAC rule by triggering a “dusting” campaign, sending small amounts of crypto processed through Tornado Cash to unsuspecting high-profile crypto holders such as Jimmy Fallon and Brian Armstrong.
• Mike Fasanello, who is critical of crypto executives who encourage the industry to simply ignore the OFAC rule, said the “dusting” campaign was a way of telling OFAC, “What now? Do you want to prosecute these parties?”
• “This was a case where OFAC went after a fly with a hammer, missed and hit a bystander’s finger,” added Fasanello, head of compliance for LVL.

That said, the ban is not as draconian as some critics feared. The sanctions backlash, which includes a Texas lawsuit bankrolled by Coinbase, apparently prompted OFAC to clarify the Tornado Cash rules.

• OFAC’s new guidelines essentially state that there will be situations where Tornado Cash transactions will not automatically be considered illegal and prosecuted. “Interacting with open source code itself, in a way that does not involve a prohibited transaction with Tornado Cash, is not prohibited,” the agency said.
• Cryptoholders who need to complete Tornado Cash transactions that were initiated prior to the OFAC sanction “may request a specific license to engage in transactions involving the virtual currency in question.”
• The agency even addressed “dusting,” saying that some individuals “may have received unsolicited and nominal amounts of virtual currency or other virtual assets from Tornado Cash.” They are technically covered by the sanction, but the agency “will not prioritize enforcement” as long as they involve “no other sanctions.”
• OFAC also noted that “teaching, sharing, or writing about the code is not subject to sanctions, making it clear that it is the use of Tornado Cash that is prohibited,” Will Callahan, director of government and strategic affairs at the Blockchain Intelligence Group, told Protocol.

“These guidelines are very narrow,” Greg Kidd, founder of VC firm Hard Yaka, told Protocol. But, he added, the clarification on dusting and “the notion that OFAC will not prioritize enforcement against these marginal circumstances” are positive steps. In fact, Callahan said he believes OFAC’s Tornado Cash sanction will “probably lead to more acceptance” of the software even as it leads to “increased scrutiny of its use.”

— Benjamin Pimentel (e-mail | twitter)

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