But the sanctions aimed at Tornado Cash are novel. Tornado Cash is known as a mixer, obscuring the source of digital assets by pooling them together before users withdraw them. It exists as software code on a decentralized, globe-spanning network of computers, and its authors wrote it in such a way that even they can’t edit it. Crypto industry leaders say they are not sure what they need to do to stay on the right side of the law.
“More than anything else right now, we’re an industry that needs guidance,” said Ari Redbord, a former Treasury official now with TRM Labs, which provides crypto companies with tools to monitor fraud and financial crime.
One crypto company that has attracted scrutiny from U.S. regulators and law enforcement in the past, Tether, may be in violation of Treasury’s new rules. According to a Washington Post analysis of data from Dune Analytics, a crypto intelligence firm, Tether is not blacklisting accounts associated with Tornado Cash.
So far, the U.S. government has not taken action. “Tether has not been contacted by U.S. officials or law enforcement with a request” to freeze transactions with Tornado Cash, Tether’s chief technology officer, Paolo Ardoino, said in a statement, adding that the company “normally complies with requests from U.S. 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 obligated to fall in line with Treasury’s sanctions. The Hong Kong-based company suggests it is not, because it “does not operate in the United States or onboard U.S. persons as customers,” Ardoino said. But he said the company considers Treasury sanctions “as part of its world-class compliance program.”
At other times, Tether executives have claimed the company is overseen by Treasury since it is registered with the Financial Crimes Enforcement Network, a bureau of the department that combats illicit finance.
When asked whether Treasury considers Tether to be in violation of Tornado Cash sanctions, the department declined to comment.
Sanctions experts said the matter is debatable. The restrictions “generally apply to all U.S. nationals or corporations, or any person or organization in or doing business in the United States, or any transactions touching the United States,” Scott Anderson, a former State Department adviser now with the nonpartisan Brookings Institution, said in an email. “I don’t know whether Tether falls within that scope or not. But if there is a chance that they (or their employees) might, noncompliance could carry real legal risk.”
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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, it’s a particularly bad time for any crypto-related company to do that,” said former official, who spoke on the condition of anonymity because they were not authorized to speak publicly. “It looks like that’s what they’re doing.”
Tether’s response, and the ambiguity around it, highlights the firestorm Treasury has unleashed with its most recent bid to thwart criminal abuse of digital assets.
Cryptocurrency developers have long been divided on whether they are merely working on an innovative financial technology or are part of an explicitly political attempt to create a shadow financial system beyond the reach of government control.
But crypto executives largely agree that Treasury overstepped with its Aug. 8 announcement against Tornado Cash, which they frame as an unprecedented targeting of computer code, rather than a person or entity typically on the receiving end of sanctions. Some argue the sanctions may be unconstitutional — and could be an attempt to open a wider assault on privacy protections offered by their technology. Many are trying to determine how to comply with and resist the decision.
A Treasury 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 illicit actors.”
The Treasury Department is working with industry representatives “to monitor the effects of this action and issue guidance as needed,” said the spokesperson, who spoke on the condition of anonymity because of the sensitive nature of the sanctions issue.
Roman Semenov, a Tornado Cash co-founder, wrote in a direct message on Twitter to The Post that the sanctions “will definitely deter many people” from using the service.
Some Tornado Cash users may innocently deposit legitimately acquired cryptocurrency and withdraw it to make untraceable charitable donations — as ethereum co-founder Vitalik Buterin claimed to have done to contribute to Ukraine’s war effort. Depending on the timing, some users’ transactions may have helped North Korean-affiliated hackers cover their tracks. In June and July, 41 percent of funds that passed through the service were linked to hacks and other thefts, according to TRM Labs, a blockchain analytics firm.
Tether has a history of racking up penalties from regulators. In 2021, it paid $18.5 million to settle charges from the New York attorney general’s office that it lied about the composition of the assets backing its stablecoin, known as USDT. The company paid another $41 million later that year to settle similar allegations from the Commodity Futures Trading Commission.
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And it has neglected to comply with U.S. sanctions against a crypto program before. A Post analysis in April found Tether continued to allow transactions with accounts allegedly belonging to Chatex, a Moscow-based digital asset exchange that Treasury sanctioned last year. Since Tornado Cash’s sanctioning this month, $5,000 worth of USDT has been deposited with the mixer, according to The Post’s analysis.
Tether’s nearest competitor, Circle Internet Financial, has taken a different approach. The day after the sanctions were announced, the U.S.-based company said it moved to comply by freezing $75,000 worth of its stablecoin, USD Coin, in Tornado Cash wallets and blocking transactions with the blacklisted accounts.
Yet, Circle chief executive 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 questions about privacy and security” and would invite “more blunt force enforcement actions 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 Treasury “has not adequately acted to mitigate the foreseeable impact its action would have on innocent Americans.” Coin Center declined to comment further.
Tornado Cash is set it up to function automatically, and it cannot be altered or shut down. “It’s like shouting at a vending machine,” said Michael Mosier, a former head of Treasury’s Financial Crimes Enforcement Network who is now general counsel of crypto privacy firm Espresso Systems. “It’s not the way to make a behavior change, so it’s not going to effectuate the national security goals the system was set up to achieve.”
Tornado Cash has already seen a precipitous drop in the crypto it is processing since the sanctions took effect. Daily deposits to the program have fallen from approximately $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, crypto analysts say, the tool becomes less useful to illicit actors, who need a large pool of crypto to effectively obscure the assets they send through it.