In its pursuit of money laundering by North Korean hacking groups, the United States has brought legal charges against individuals, organizations and even the North Korean government itself. It froze bank accounts, imposed sweeping sanctions, and tracked suspected money launderers deep into the deep web.
But earlier this month, when the U.S. approved a blockchain-based software, the investigation of the Lazarus Group, which is accused of laundering millions of stolen cryptocurrencies, took an unprecedented turn transformation.
The move shocked the cryptocurrency world, which relies on the same software for legitimate money transfers. Many experts are now wondering if this is indicative of a more aggressive U.S. approach to regulating decentralized applications. The case also raises puzzling questions about how exactly one can police a piece of code that no one controls.
Tornado Cash’s relationship with Lazarus Group
The software in question is Tornado Cash, a cryptocurrency “mixer” that allows Users disguise the source and recipient of their transactions on the Ethereum blockchain. Cryptocurrency holders use mixers to maintain the privacy of their accounts on ultra-transparent blockchains like Ethereum. The problem, according to the U.S. Treasury Department, is that mixers are also a common tool for money launderers.
Tornado Cash has processed over $7 billion worth of Ethereum for around 60,000 users since its launch. Founded in December 2019. U.S. authorities say those users include the Lazarus Group, which has been a frequent target of U.S. sanctions. Recently, the United States claimed that Lazarus used Tornado Cash to launder some of the $620 million in cryptocurrency stolen from the popular crypto game Axie Infinity.
Allegedly, the stolen tokens were using multiple mixers, but another was approved The mixer is
a privately created and owned company. Tornado Cash is unique among accredited mixers because it is decentralized open source software by design (anyone can copy it) (no one owns it) and exists on a global distributed ledger (it cannot be destroyed). How do you sanction?
The Treasury Department’s Office of Foreign Assets Control (OFAC) imposes financial sanctions on individuals and companies it deems to pose a security risk, such as terrorists and drug dealers. OFAC added Lazarus’ three known Ethereum addresses to its sanctions list in April, then added private mixer Blender in May and Tornado Cash on August 8.
is included in this Specially Designated Nationals and Blocked Persons List, also known as The SDN List, which effectively blacklists an individual or business for all U.S. economic activity. Violating sanctions by doing business with someone on the SDN List is a serious offense that can result in significant fines or imprisonment.
But it’s one thing to avoid individuals or companies on the SDN list. Avoiding Tornado Cash entirely is another story, as many cryptocurrencies sometimes go through their protocols. The well-known stablecoin operator Tether, which has come under regulatory scrutiny in the past, has yet to blacklist accounts linked to Tornado Cash sanctions, The Washington Post reported on Aug. 24.
A series of vague sanctions
in its press release mentions Tornado Cash as if it were a company, but it is not. But as digital rights advocacy group Electronic Frontier Foundation wrote in a blog post, Tornado Cash could mean any number of things: it’s several different versions of software, code published on GitHub, a website, and a decentralization A Decentralized Autonomous Organization (DAO), a cryptographic collective that votes on changes and maintenance of projects. The Treasury Department did not respond to repeated requests for clarification on who or what the specific sanctions were.
On August 10, a developer of Tornado Cash was arrested in the Netherlands on charges of “concealing criminal financial flows and facilitating money laundering”, but it is unclear whether the arrest was related to the Two days ago, the United States announced sanctions.
The level of ambiguity in sanctions announcements is unusual for OFAC, said Arie Redbod, a former senior adviser to the Treasury Department who is now the head of legal and government affairs at the U.S. Treasury Department. Blockchain analytics firm TRM Labs. “The designation is special,” he said, because OFAC has previously been “very, very targeted — almost like a scalpel” to hunt down specific bad actors in the cryptoeconomy.
This gives any cryptocurrency sent through Tornado Cash, even funds that have ever been through the Tornado Cash protocol, said Peter Van Valkenburgh, research director at Coin Center, a crypto-focused nonprofit and advocacy group Brings uncertainty.
“My favorite analogy is: if you sanction an Iranian writer, that’s one thing, it means Americans are not allowed to buy from him contract to buy the rights to him. The next novel. It’s a perfectly legal use of sanctions, and he said, “What’s happening here is … the book has been written and it’s already in the hands of thousands of Americans. In the home library — if not thousands, so the sanction is a bit like saying you can stop reading that book. ”
According to research by crypto analytics firm Chainalysis, about 23% of cryptocurrencies traded through mixers will be illegal in 2022, up from 12% in 2021. However, in Most of the roughly $4.5 billion sent through mixers so far in 2022 is ostensibly legal. It’s unclear if all of this money is subject to sanctions, as far as the U.S. government is concerned.
What signal does the government have on cryptocurrencies?
Coin Center claims OFAC “oversteps its authority” and may sue on behalf of parties that have undergone due process, and these sanctions may violate free speech rights. Coin Center, EFF and other groups have expressed concern that because computer code is recognized speech, sanctions orders may also be The First Amendment is involved.
If Tornado Cash were to be sanctioned, in fact Carlton Greene, OFAC’s former assistant director for transnational threats and now a partner, said it would be deliberate rather than confusing oversight, then it could mean that the Treasury Department is signaling that decentralized software and entities will not be exempt from its sanctions work. At the law firm of Crowell & Moring.
” Contrary to what some people think about Decentralized Finance, the fact that you create a smart contract and you are not standing there manually every day processing all the transactions does not mean that OFAC will exempt you from compliance requirements if you create The content was used by sanctioned parties for money laundering and inappropriate activities,” Greene said.
