FT Cryptofinance: Crypto, Sanctions and the First Amendment

Welcome to this week’s edition of the FT’s Cryptofinance newsletter. Today we look at crypto mingling services and rights enshrined in the US Constitution.

The hallowed First Amendment probably wasn’t the territory the US Treasury Department had in mind when it imposed sanctions on crypto-mingling service Tornado Cash this summer.

In August, the department had enough of Tornado, claiming it was used to launder more than $7 billion and was a conduit for North Korea-backed hackers to evade sanctions. Mixers like Tornado hide the trace of transfers that would typically be publicly available on the digital ledgers that underlie cryptocurrencies.

The results were pretty tough. All transactions that went through Tornado Cash’s virtual desktop were blocked if they involved US users or were carried out anywhere in or through the country. Everyone got the message: If you’re American, don’t go near it.

Crypto purists were predictably less than impressed, raising familiar grievances such as government overreach and trampling on individuals’ financial privacy rights.

They are now taking the complaints a step further. This week, the Coin Center, a crypto-focused non-profit research and advocacy group based in Washington, filed a lawsuit against the Treasury Department and its Office of Foreign Assets Control (Ofac), alleging that they lack the authority to impose sanctions on Tornado Cash.

It has been joined by crypto investor David Hoffman, software developer Patrick O’Sullivan and “John Doe”, who was described in the filing as a human rights activist who has donated crypto to Ukraine.

Will Coin Center get anywhere with suing one of the world’s most powerful financial crime agencies? And if not, why even bother?

The lawsuit did not really address the substance of the Treasury’s allegations: that Tornado was used as a conduit for money laundering.

Instead, Coin Center’s case revolves around their view that they are protected by the First Amendment, which protects the rights of groups (and individuals within them) to exercise free speech. The criminalization of Tornado Cash, the plaintiffs claim, violates the constitutional rights of users who “need it to protect their private associations”. John Doe fears that Russian agents will learn of his pro-Ukrainian activities and harm him and his family.

This line of attack may not be enough. “I am quite skeptical of the First Amendment claim. . . I don’t think there is precedent to support a right to make completely anonymous donations through a specific currency,” Peter Fox, a partner at Scoolidge, Peters, Russotti & Fox, told me via email.

Admittedly, Coin Center doesn’t help itself. It claims it is not a criminal, and never deals with criminals or terrorists. However, it also states: “It is impossible to tell whose assets are sent to Coin Center’s account when they come from a Tornado Cash address.” Coin Center declined to comment on how these statements can coexist.

Fox said that private associations can be maintained without the use of Tornado Cash, or any other crypto-mingling service. “Why don’t you cut them a check? It’s quite private.”

Coin Center’s strongest position may be the claim that the Treasury and Ofac have exceeded their mandates because Tornado Cash has also been used for payments between ordinary Americans who just want to send pure cash between each other, privately. Fox said this point could be a problem for the government.

Perhaps the battle is not about the present, but the future. “Whether Coin Center is successful or not, it will only improve our blockchain laws and policies to increase the public discourse around open source software tools in general, including the likes of Tornado Cash,” said Teresa Goody Guillén, partner at US law firm BakerHostetler.

But perhaps, as America’s Founding Fathers knew, some truths are self-evident.

As John Reed Stark, former head of the SEC’s Office of Internet Enforcement, told me this week: “The industry is constantly screaming for regulatory clarity, for certainty, for detail, but every time they get it, they file a lawsuit and say it it is not they who.”

What do you think of Coin Center’s case against the Treasury? Send me an email at [email protected].

Weekly highlights

• As the saying goes: when it rains it rains, and Solana Country is very wet. Last week I asked where the network would go after a series of recent failures, and this week Solana-based DeFi platform Mango Markets was hacked for $100 million. Joining the ever-lengthening list of DeFi hacks came the Mango Markets team clarified that “oracle price reporting was working as it should” – a detail sure to inspire a lot of confidence in the purported future of finance.

• France made crypto headlines again this week after welcoming exchange platform Crypto.com to its shores. The platform’s registration as a Digital Asset Service Provider under the Autorité des Marchés Financiers (AMF) follows Binance’s registration in EU member states months earlier.

• Meta continues to push the boundaries of technology. If you plan to move your life to Meta Horizon Worlds, you can look forward to . . .*checks notes* . . . to have bones. An observant Twitter user pointed out that Maddena popular American football video game, achieved the same feat in 1994, which I feel falls under Meta’s latest innovation.

• Scrutiny of crypto’s apparent role in exposing financial sanctions isn’t going away. This week, exchange platform Bittrex agreed to pay $29 million to settle enforcement cases with US authorities for “apparent violations” of sanctions against countries such as Iran, Cuba and Syria. Read about it here.

• Binance has been accused by the co-owner of a UK subsidiary of providing a “grossly inaccurate” annual report for a UK entity linked to the crypto exchange. The accusation comes after Binance’s public outing with the Financial Conduct Authority last year. Read more here.

Soundbite of the week: Tether

The undisclosed commercial paper backing the world’s largest stablecoin has long attracted speculation. No more.

“Tether is proud to announce that we have completely eliminated certificates from our reserves. This is proof of our commitment to backing our tokens with the most secure, liquid reserves in the market.”

Nothing to do with the 4.4 percent offered in short-term US Treasuries, then? Let’s hope this speeds up the long awaited revision as well.

Data mining: Coinbase problems continue

Whether it’s cutbacks, internal strife, or tussles with regulators, 2022 has been a difficult year for Coinbase.

Recent data published by analytics platform CryptoCompare shows that momentum has yet to reverse as it prepares to announce third-quarter results on November 3. The monthly spot trading volume on the exchange was down 17 percent to 48 billion dollars compared to 120 billion dollars at the start of the year. Spot trading volume has now reached its lowest point since December 2020.

Additional data from CryptoCompare shows that monthly spot trading for Binance, FTX and OKX increased during the same period.

Maybe the documentary about Coinbase and its co-founder Brian Armstrong will change people’s minds. Mind you, The Atlantic was not a fan.