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OFAC Backtracks but Tornado Cash Sanctions Already Set a Terrifying Precedent

OFAC Backtracks but Tornado Cash Sanctions Already Set a Terrifying Precedent

OFAC Backtracks but Tornado Cash Sanctions Already Set a Terrifying Precedent

A government, an exchange and a developer: The tragic tale of a strategy to cut off a smart contract.

A government, an exchange and a developer: The tragic tale of a strategy to cut off a smart contract.

A government, an exchange and a developer: The tragic tale of a strategy to cut off a smart contract.

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AccessTimeIconSep 15, 2022 at 9:30 p.m. UTC
Updated Sep 15, 2022 at 9:30 p.m. UTC
Layer 2
AccessTimeIconSep 15, 2022 at 9:30 p.m. UTC
Updated Sep 15, 2022 at 9:30 p.m. UTC

Zac Colbert has been writing about cryptocurrencies, intergenerational wealth and FinTech for over half a decade.

On Sept. 13, the U.S. Treasury Department provided some clarity on the Tornado Cash sanctions. The federal agency updated its FAQs to say that “interacting with open-source code itself” is not illegal. However this came with a caveat – this interaction is only legal as long as it does not include a prohibited transaction.

It further explained that copying the protocol’s code, publishing the code and even visiting an archived version of the Tornado Cash website are all allowed.

Zac Colbert is a financial writer.

“Similarly, U.S. persons would not be prohibited by U.S. sanctions regulations from visiting the Internet archives for the Tornado Cash historical website, nor would they be prohibited from visiting the Tornado Cash website if it again becomes active on the Internet,” according to the U.S. agency.

A glimmer of hope there, perhaps, for what was one of the leading Ethereum-based mixers. But is it mere coincidence that this move comes just days after the Coinbase crypto exchange filed a lawsuit in response to the sanctions?

Treasury violates the First Amendment

Coinbase’s lawsuit claims the sanctions themselves are a violation of the First Amendment, which establishes the right of free speech. In the landmark case of 1996, Bernstein v. the Department of Justice (DOJ), it was established that computer code should be considered speech, and the right to free speech is protected by the U.S. Constitution.

And so, by sanctioning this open-source code the Treasury Department is effectively limiting speech.

Back in August, when the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned the Ethereum-based smart contract, it was the first time the government department blacklisted a piece of technology not explicitly tied to a person or entity. Its specially designated nationals list is typically limited to individuals and institutions.

“We have no issue with the Treasury sanctioning bad actors and we take a hard stance against unlawful behavior. But in this case Treasury went much further and took the unprecedented step of sanctioning an entire technology instead of specific individuals,” Coinbase said in a blog post.

Dapp developers, beware

Just because a tool is sanctioned doesn’t guarantee hackers, criminals and the like will refrain from utilizing it. Criminals by definition have no respect for the law, so it’s reasonable to assume they will continue using the smart contract for their nefarious purposes, sanctions be damned.

Whereas North Korean-linked Lazarus Group got away with an alleged $455 million by laundering stolen money through the smart contract mixer – one of the primary catalysts for the sanctions – Alexey Pertsev, a Tornado Cash developer, got arrested. On Aug. 23 it was revealed he’d be spending an additional 90 days in jail, at minimum.

Pertsev has never been formally charged with a crime by the Dutch investigators, who said other arrests related to Tornado Cash may be coming down the pike. Whether OFAC’s clarifications will play into his release remains to be seen – but it seems to support the argument that publishing open-source code is not a crime.

A developer has little to no say how their software is used, and even less over who uses it. How much tech talent will now be put off from creating the next big blockchain innovation?

Shortsighted strategies and a threat to privacy

Pertsev’s arrest rightfully instigated considerable ire from the Web3 community, which has warned of the alarming effect it has had on developers already. The fact he was arrested in the first place and held without bail was taken as a chilling precedent.

It can also be argued that the sanction itself is overbroad, keeping people who have legitimate reasons to use mixers and liquidity pools from doing so and putting their financial privacy and personal data security at risk.

Open-source software is accessible to anyone. The Ethereum blockchain exists to be accessible to anyone. While the code is still accessible, the U.S. government has done the tens of thousands of U.S. crypto users a disservice by erecting needless bans. Tornado Cash is far closer to a public good than a piece of contraband.

This is without saying whether or not it’s practical to sanction a piece of code. If it’s open source, it’s free to fork. If that happens OFAC will continually be playing catch-up, trying to sanction newly deployed smart contracts left, right and center. It’s not a realistic strategy, let alone completely unwarranted.

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Zac Colbert has been writing about cryptocurrencies, intergenerational wealth and FinTech for over half a decade.

Zac Colbert has been writing about cryptocurrencies, intergenerational wealth and FinTech for over half a decade.