Tether’s Tornado Cash Noncompliance Is Less Brave Than You Think

The world’s largest stablecoin issuer won't freeze tainted addresses, for now.

AccessTimeIconAug 25, 2022 at 6:00 p.m. UTC
Updated May 11, 2023 at 4:37 p.m. UTC
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Tether Holdings Limited, the issuer of the world’s largest stablecoin, USDT, clarified in a blog published Wednesday that it will not “unilaterally” blacklist blockchain addresses tied to the sanctioned cryptocurrency mixer Tornado Cash. The move has been hailed by some in crypto as a brave stance against regulatory capture.

In reality, it’s something a little less. But it is a reminder that if crypto is to succeed, it must be brave.

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Earlier this month, the U.S. Treasury Department’s Office of Foreign Assets Control added Tornado Cash, an open-source anonymizing service on Ethereum, to its Specially Designated Nationals and Blocked Persons list (SDN). This makes it a crime for any U.S. person to use the open-source protocol.

Tornado’s sanctioning decreases financial privacy in crypto and has thrown a serious monkey wrench into the world of decentralized finance (DeFi). Some have called it unconstitutional, and a threat to open-source development in general. The sanction is something that should be challenged, and noncompliance is commendable while crypto lobbyists, including Coin Center, fight it in the courts.

On the surface, Tether’s decision is a signal that crypto advocates will fight to have their voice heard. It recreates some of the early magic of Bitcoin as a radical break from a corrupt and convoluted financial status quo. But, if you really think this, I urge you to read Tether’s blog.

Tether’s position is basically “compliance … but later.” The firm hasn’t yet sanctioned addresses because it hasn’t been asked. “Tether normally complies with requests from U.S. authorities, being in contact with them almost on a daily basis,” the blog reads.

Further, Tether states that immediately blacklisting addresses “without the verified instruction of law enforcement” could potentially interfere with those agencies’ investigations.

We’re now in a situation where the supposed radical thing to do would be to comply with the U.S. government’s banning of a few lines of code, Tether suggests. In fact, Tether said its main competitor, Circle Internet Financial Ltd., issuer of the second largest stablecoin, USDC, was “premature” in freezing 38 addresses on Aug. 8 because it could “jeopardize” global regulatory efforts.

How far crypto has fallen. Instead of challenging an overbroad ruling on its merits, Tether’s “noncompliance” is more of a justification for government interference in systems that are meant to stand apart and be resilient from the directives of anyone.

Of course, we don’t know Tether’s ultimate motivation for not freezing addresses, and its decision to “hold firm” (at least until asked directly) does have the practical effects of letting tainted Etheruem wallets continue to transact as designed. All of this weird rationalization could be for legal cover if it finds itself in court for violating U.S. law.

It could also be a way to momentarily differentiate USDT from USDC, which is quickly eating into Tether’s stablecoin dominance. But we’re already living in a world where the two largest stablecoin issuers, representing a combined $119 billion in value, blacklist blockchain addresses if asked. Tether has banned 702 addresses, and Circle 82, over their lifetimes.

Skeptical crypto researcher and podcaster Bennett Tomlin also noted that Tether typically has not blacklisted other sanctioned Ethereum addresses on the SDN list, so while its decision here may be “aggressive” it is not out of the norm for the company.

The Tornado Cash sanction is significant because it’s the first time the U.S. government has banned a smart contract outright. It’s relevant because almost half the entire Ethereum network is only two degrees of separation from an address that interacted with Tornado. But the reason to support Tornado is because financial privacy is not a crime, and neither is open-source development.

The U.S. Treasury Dept. stated that nearly $7 billion of funds were laundered through Tornado since 2019, which represents the total value of funds that interacted with the protocol. But only a fraction of that amount can actually be tied to criminal actors. The protocol was also used for anodyne and humanitarian causes.

Last week I wrote that DeFi developers should not be criticized for blacklisting Tornado-connected wallets from their front ends. They’re taking on the risk of building permissionless protocols and there should be shared responsibility in building on-ramps.

Likewise, I also don’t think Tether should be criticized for freezing addresses when that ultimately happens. The decision not to unilaterally and immediately block addresses is just another way of saying “they could do those things.” The whole point of crypto is to build systems that are sanction-proof – and that’s something Tether can never be.


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Daniel Kuhn

Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.

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