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US Congressman Tom Emmer defends Tornado Cash against OFAC sanctions

By Daniela Ešnerová

13:00, 25 August 2022

Tornado cash (TORN) logo.
Emmer’s letter shows that there are still a lot of unanswered questions on how the TORN sanctions would be carried out, Riyad Carey, Kaiko’s research analyst, points out. – Photo: ShutterStock

Tom Emmer, Republican Congressman representing Minnesota, stood up against a controversial decision by the US Treasury’s sanctions department to blacklist a cryptocurrency payment system, Tornado Cash (TORN), which sent shockwaves through the cryptocurrency industry earlier this month.

Emmer sent a letter addressed directly to US Treasury chair Janet Yellen, asking for an explanation from the Office for Foreign Assets (OFAC), and demanding answers to nine questions about the sanctions.

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‘Unique sanctions’

On 8 August, 2022, OFAC sanctioned the cryptocurrency service, which allows anonymous payments and cryptocurrency wallets associated with it. OFAC said a total of $7bn worth of virtual currency was laundered through Tornado Cash since its creation in 2019. The Treasury also added that a well-known North Korean government-backed hacking group Lazarus Group has laundered nearly half a billion dollars through Tornado Cash.

The move marked the first time ever that the US regulator has sanctioned a piece of code, and many from the crypto industry feared this could set a dangerous precedent.

“OFAC has a long and commendable history of utilizing financial sanctions to enhance the national security of the United States.

“Nonetheless, the sanctioning of neutral, open-source, decentralized technology presents a series of new questions, which impact not only our national security, but the right to privacy of every American citizen,” Emmer wrote.

Right to reply 

Shortly after OFAC’s announcement,  USDC stablecoin issuer Circle blacklisted 45 sanctioned Ethereum (ETH) addresses, disabling them to send or receive USDC.

Emmer, among others, requested OFAC to provide information on how the affected US users could access their locked assets. 

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Sharp decrease of TORN

The market reaction to the sanctions was significant: “On the most basic level, the sanction of Tornado Cash led to a sharp decrease in the associated token (TORN), from over $30 to under $10, as well as a spike in volume across exchanges. But the fallout and reactions are much more interesting, said Riyad Carey, research analyst at cryptocurrency data provider Kaiko.

Carey lists Circle blacklisting the sanctioned Ethereum addresses as “the most significant action thus far.

“Since the collapse of Terra and UST it had seemed like decentralized stablecoins had fully fallen out of favor, but Circle's action cast light on the implications of DeFi being so reliant on a centralized stablecoin,” he says.

“Additionally, some major DeFi applications like Uniswap banned associated wallets from using their "official" front end, though they may still interact with the smart contract directly or through an alternative front end.

Bi-partisan agreement

Emmer's letter expectedly gathered approval from the cryptocurrency industry, but also from a political adversary: “Time to be Minnesotan and bi-partisan. Actually agree with Emmer on something. OFAC listing is ambiguous at best and could violate free speech of neutral open source code,” managing director venture capitalist and democrat Will Hailer reacted.

Kaiko's Carey points out that Emmer's letters address some burning questions: “Regarding the industry's reaction, as much as the US government can have trouble understanding crypto, so too can it work in reverse. I have seen a lot of speculation that Ethereum proof of stake validators will be required to 'comply' with OFAC sanctions and censor certain wallets at the protocol level.

“As Rep. Emmer's letter shows, there are a lot of unanswered questions about how these sanctions will actually be implemented and I haven't seen any indication that OFAC is calling for this at the protocol level. For what it's worth, Vitalik Buterin indicated that he would favor ‘burning’ the stake of any validator that censors transactions.”

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