Another spin in the crypto-sanctions twister is POLITICO

Editor’s note: Morning Money is the free version of POLITICO Pro Financial Services’ morning newsletter delivered to our subscribers every morning at 5:15am. The POLITICO Pro platform combines the news you need with the tools you can use to take action on the day’s most important events. Act on the news with POLITICO Pro.

Tornado Cash has now entered the Washington spinning cycle.

The Treasury Department’s Aug. 8 sanctions against a decentralized mixing service used to obfuscate crypto transactions on the Ethereum blockchain quickly turned into a full-blown crisis for decentralized finance developers, privacy advocates and other pro-crypto groups, who said it could be a harbinger of future crackdowns.

Two weeks later, Congressional leaders are beginning to take notice.

“OFAC — they don’t know how to deal with this,” the spokesman said. Tom Emmer (R-Minn.), who sent the letter on Tuesday to Secretary Janet Yellen requesting additional information on the Treasury Department’s Office of Foreign Assets Control (OFAC) case against Tornado. “So it looks like they’re going to make a mistake, potentially violating the privacy and free speech of law-abiding Americans. And I think it’s wrong.”

Emmer, who also chairs the National Republican Congressional Committee, said: “OFAC needs to figure out how to get other tools to fight bad actors.”

Founded in 2019, Tornado Cash fell out of favor with the Treasury Department after North Korean hackers allegedly used the protocol to launder hundreds of millions of dollars in stolen digital assets. This was not the first time that OFAC has targeted a mixing service, having previously identified as a laundry machine for other Russian and North Korean-backed criminal entities.

But while few have moved to sanction — a centralized organization that allegedly took custody of users’ crypto before spitting it back out — the Treasury Department blacklisted Tornado Cash for open-source software that, as its developers say, is no longer in control.

Functionally, Tornado is now an anonymous perpetual motion engine: “Decentralized and unstoppable until Ethereum is changed or eliminated,” founders wrote in a blog post in May 2020. Tornado co-founder Roman Semenov highlighted the moment as fears of crypto being used to evade sanctions — particularly after Russia’s invasion of Ukraine — have grown. “There’s not much we can do” to limit transactions on the protocol, he told Bloomberg in March.

The Treasury said the sanctions against Tornado Cash, including the entities that maintain the protocol and oversee upgrades, are no different from the sanctions that have been applied to other crypto actors over the years.

DeFi advocates and crypto advocacy groups say this simplifies matters, and that blacklisting a code — rather than a specific business or individual — amounts to an attack on free speech and due process.

Coin Center, a Washington-based crypto-focused think tank, has already said it is the study of a legal problem on due process grounds. (In particular, as POLITICO’s Ben Schreckinger noted last weekthere is precedent for First Amendment protections against publication of cryptographic code.)

To be sure, Tornado can and has been used by legitimate entities to privatize transactions that are otherwise traceable to Ethereum’s public ledger. The This was reported by the blockchain analysis firm Chainalysis earlier this month, roughly two-thirds of the crypto that passed through the service came from centralized exchanges or DeFi platforms.

But the same report noted that nearly 30 percent of that volume was either stolen or sent there by groups that were eventually sanctioned.

And this is where the ruble lies. Privacy tools that benefit ordinary crypto traders can also be used by criminals. Criminals took notice en masse.

Tornado’s decentralized code “didn’t fit well” with anti-money laundering rules and knowledge of its client, said former CFTC Commissioner Don Stump, who was recently hired as a strategic adviser to blockchain analytics firm Solidus Labs.

“The authorities have shown – and will continue to show – a really strong interest in this element of AML-KYC that makes our markets robust,” she said. “More will be done in this space.”

However, determining how authorities will move forward with enforcement or sanctions against ethereal pieces of software no longer controlled by the core development team is a much more complex matter.

“I would be above pretending to know the ins and outs of what OFAC is doing over there,” Stump added.

WEDNESDAY – And the bars in Jackson Hole are preparing for what will happen. Send tips, story ideas and feedback to [email protected], [email protected] or [email protected].

Durable goods data released at 8:30 a.m…. Pending home sales data released at 10 a.m. … Bipartisan Policy Center hosts a virtual discussion on blockchain and crypto policy at 2 p.m.

WHITE HOUSE BUDGET UPDATED — From Kate: “The Biden administration is forecasting a record reduction in the budget deficit this year as federal tax revenue beats expectations and spending on pandemic relief programs is reduced. The budget deficit for fiscal year 2022 will be approximately $1 trillion — That’s $1.7 trillion less than last year’s deficit and about $400 billion less than officials projected in March., according to the White House’s half-year budget update released Tuesday. It would be the lowest annual deficit since 2019, before the pandemic plunged the US into a deep recession and triggered a wave of government spending to cushion the economy.”

“MUJA” INFO ON TWITTER AMID MASK TRIAL — WaPo’s Joseph Menn, Elizabeth Dwoskin and Kat Zakrzewski: “Twitter’s management misled federal regulators and the company’s own board of directors aboutextreme, glaring flaws” in its protection against hackers, as well as its meager anti-spam efforts, according to an explosive whistleblower complaint from a former security chief.”

From POLITICO’s Rebecca Kern: “Informant’s complaint could complicate the lawsuit filed against Twitter [Elon] muskfor trying to derail a deal to buy the company for $44 billion. Musk claimed that the company had seriously underestimated the amount of spam and bots on the platform. [Peiter] Zatko said in the complaint that Twitter’s current CEO, Parag Agrawal, “lied” when he tweeted that the company encouraged finding and removing spam as much as possible.

ICYMI: PEN WHARTON’S STUDENT DEBT BUDGET MODEL— Federal College Student Loan Debt Forgiveness — up to $10,000 for borrowers with incomes below $125,000 a year — cost the government $300 billion over the next decade, according to a Penn Wharton budget model analysis released Tuesday. And borrowers in the top 60 percent of the income distribution will receive most of the benefits.

FALLING GAS PRICES DUNT THE WEAPONS OF THE WORKING RABBIT —Bloomberg’s Ari Nutter: “Republicans, who have used skyrocketing gas prices as a powerful political tool to bash Democrats ahead of the midterm elections, have a problem: Pump prices are steadily falling.”

Bad time — NYT’s Jim Tankersley: “Pandemic aid programs have helped the U.S. economy recover much faster than many economists expected, but they ran their course as prices soared at the fastest pace in the last 40 years. … While the extent to which the bailout fueled inflation remains a matter of controversy, almost no one, in Washington or on the front lines of helping vulnerable people across the country, expects another round of federal aid even as the economy slips into recession.”

ADP REVAMP reports — POLITICO’s Eleanor Mueller: “Payroll giant ADP is turning its closely-watched monthly federal jobs report forecasts into a broad and independent analysis of the labor market that draws on its own breadth of data… Because it’s based on payroll data — that [ADP Chief Economist Nela] Richardson called the “largest real-time crowdsourcing” in the US – not a monthly survey of institutions, the firm says it may be more up-to-date and, as a result, more useful than the Bureau of Labor Statistics release.”

NEW HOMES SALE SLIDE — Bloomberg’s Reed Pickert: “US New Home Sales fell in July for the sixth time this year to the slowest pace since early 2016, extending a months-long deterioration in the housing market caused by high borrowing costs and retreating demand.”

GOOGLE “NAZONE EFFECT” —Bloomberg’s Janet Laurin: “The funds lost an average of 10.2% to maturity in the 12 months through June, according to data to be released Tuesday by the Wilshire Trust Universe Comparison Service. The largest funds – with more than $500 million in assets – increased much better, with a slight increase of 0.9%.»

IS THIS BOB PETTIT? BECAUSE I SEE SOME ST. LOUIS HAWKS — Reuters: “The Boards of Directors of the Federal Reserve Banks of Minneapolis and St. Louis in mid-July voted for a full percentage point increase in the rate charged to commercial banks for emergency loans, minutes of their meeting on discount rates on Tuesday showed.

ENERGY FROM THE FLOOD — WSJ’s Karen Langley: “The market’s rally over the summer has begun to lure investors back into equity funds. Investors poured a net $11.7 billion into mutual funds and exchange-traded funds for the two-week period ended last Wednesday, according to data from Refinitiv Lipper.”

REST IN PEACE —Gregory Zuckerman of the WSJ: “Julian H. Robertson Jr., pioneering hedge fund investor, dies aged 90.”

FLATLINERS Has interest in crypto stagnated? Last September, when interest in digital assets like Bitcoin and Ether was nearing its peak, about 16 percent of Americans surveyed by the Pew Research Center said they had invested, transacted or used cryptocurrencies. In an updated survey conducted last month, the percentage of Americans who said they used crypto was unchanged. “Lack of overall change comes despite heavy news coverage of crypto,” Pew’s Michelle Faverio and Navid Massarat wrote in a published research note on Tuesday.

In particular, of those who said they had traded in digital assets, just under half said their investments performed worse than expected.

CELSIUS OPPOSITE Bloomberg’s Jeremy Hill: “Celsius, which filed for bankruptcy last month after freezing customer assets, says Keyfi Inc. and founder Jason Stone lied about their investment ability and were incompetent in managing Celsius’ assets. The crypto lender also accused Stone of outright theft … These allegations come after Stone sued Celsius last month, accusing the crypto lender of fraud and defrauding him of potentially hundreds of millions of dollars.”

Business activity in Europe and Japan fell in August, according to new surveys indicates a sharp slowdown in global economic growth as higher prices weaken consumer demand and the war in Ukraine disrupts supply chains. — WSJ’s Paul Hannon

Russia’s economy escaped collapse, which many predicted after Moscow sent its forces into Ukraine six months ago, with higher prices for its oil exports, to soften the effects of Western sanctions, but some Russians have difficulties. — Reuters Andrey Ostruh

Australia, which is credited with spreading the avocado on toasts around the world, there is squeaking under a mountain of green pear-shaped fruit. — WSJ’s Mike Cerny and Alison Prang

Back to top button