FT Cryptofinance: Crypto-Libertary find that sanctions also apply to them

This week we were reminded of what happens when the large decentralized crypto world view meets the US sanctions regime. Spoiler alarm: The US sanction regime wins.

The goal of the US Ministry of Finance was Tornado Cash this week, a so-called crypto service that enables users to interrupt the traceability of their activities on the Ethereum blockchain.

Usually transactions on a blockchain carry the equivalent of a cash series number with which the world can pursue payments online. With Tornado Cash, customers were able to deposit ether over an address where the funds would be mixed into a single pool that contains the funds of all users. Then it is pulled out at a different address, which means that the owner can no longer be found.

According to the Digital Asset Compliance company TRM Labs, it was "the data protection tool of the choice". While it attracted users who wanted to use it for a good cause, such as: B. Donations for a good cause in absolute privacy, of course also attracted those who had more shameful intentions. The United States claimed that Tornado Cash was used to wash more than $ 7 billion, including at least $ 500 million from state -supported North Korean hackers.

The USA see mixed services as transmission of money that must comply with the money laundering regulations. It is the second time this year that the United States attacked a crypto service because it helped North Korean hackers after imposing sanctions against blender.io in May.

Now all assets and interests of Tornado Cash are closed in the USA. All transactions that run over the virtual desk of Tornado Cash are also blocked when they affect US users or are carried out somewhere in or through the country. In other words, the crypto mixer is strictly forbidden.

It may not be surprising that it will boil the loudest libertarian evangelists from Krypto. "The Ministry of Finance seems to believe that the mere use of tools to improve anonymity and privacy is a crime," said Marta Belcher, lawyer for civil rights and cryptocurrencies.

tornado cash is designed in such a way that it is decentralized so that nobody has control. "Tornado cash is neither a person nor a business unit. It is an open source software tool. It cannot be sanctioned, it does not respond to lectures or legal inquiries," tweeted Erik Voorhees, founder of the Shapeshift stock exchange and a well-known libertarian preacher and crypto cross.

But the sanctions already seem to have had an effect. The open source software from Tornado Cash is hosted on Github, a US company that expressly prevents the violation of export sanctions in its terms of use. It had met the requirements within a few hours, as did Circle, the stable coin provider based in the USA.

This has long -term effects. If regulatory authorities can sanction code such as Tornado, then crypto mixing services on Ethereum are not the decentralized and private units for which people hold them.

But philosophical debates can be irrelevant. As many Russians have found, sanctions are a club and not a scalpel.

"Whatever you think of sanctions, financial companies and crypto companies have to make decisions to protect your customers, employees and companies because these sanctions are enforced," said Mike Castiglione, a former CIA employee and director of regulatory matters for digital assets at Eventus. told me.

On Friday, the Dutch financial criminal authorities announced that they were arrested during the week a man who is suspected of being involved in the veiling of criminal financial flows and the relief by Tornado Cash.

and an official of the US Ministry of Finance told my colleague James Politi that the appointment as a crypto mixer will not be the last one this week.

"You may have this libertarian wish, but you have lost.. This requires the law whether you like it or not," said John Reed Stark, former head of the Office of Internet Enforcement at the early this week when calling. "The United States will not be Switzerland when it comes to finance."

I would like to hear from you. What do you think of US Treasury and Tornado Cash? Mail me to scott.chipolina@ft.com .

The Highlights of the Week

• Hotbit-the "leading trading platform for cryptocurrencies" that you have never heard of -exposed operation in one of the most chaotic crypto announcements I have ever read. It was said that a former employee had violated corporate rules and possibly against criminal laws, but somehow other managers had been charged and the law enforcement authorities had frozen part of Hotbit's assets. The company says that it "has no knowledge of the illegal information" and works "active" with the authorities. The company's explanation that assets and data are "safe and correct" can be calmed down or not. Here the platform is officially and very serious Twitter announcement , together with a GIF that shows an anime-cartoon girls in tears. Great stuff.

• The difficult year of Coinbase continued, with the results of the second quarter a loss of USD 1.1 billion, since the income and the trading volume decreased. There was also noise that the stock exchange was given investigative pre-invitations from the SEC for some of its current and future products as well as staking programs, stablecoin and earnings-generating products. However, this is not new. Coinbase has announced the preservation of these lectures here for months, here and here.

• Five years ago, Blackrock boss Larry Fink described Bitcoin's popularity as a sign of how great the "demand for money laundering" is. A year ago he said: "In my last two weeks on business trip, no question was asked [About Bitcoin and Crypto]" and added: "We see very little about the demand for investors for such things". Yesterday the asset management giant launched a private Bitcoin trust and praised Bitcoin as the "main interest of our customers in the cryptoasset area". What has changed, Larry? My mailbox is open.

• The Bank of England shrilled the alarm bells in the face of future job losses in a growing meta-verse industry. "If a considerable open meta-verse occurs, households can keep a larger proportion of their assets in cryptoassets. Indirectly when people are increasingly employed in jobs in meta-severse-based environments, their employment results can be impaired by the risks of cryptoassets," said the BOE in a recently published blog post in a recently published blog post Underground.

Soundbite of the week: Coinbase "Could go to zero"

The bad Q2 performance of Coinbase has revealed the bears. According to David trainer, managing director of the investment research company New Constructs, the worst may still be imminent. He informed me of the following by email this week:

"This bad performance continues to agree with our opinion that Coinbase is a competitive company with a terribly overvalued stock. We believe that the stock falls into the ten area and has the potential to go to zero and become a zombie share if nobody intervenes to buy it."

data-mining

Are innocent users wrongly punished by sanctions against cryptomixers? The Ethereum founder Vitalik Buterin, born in Russia, said this week that he would do it Personal Tornado Cash In the past to donate to Ukraine. For obvious reasons he didn't want to make it public at the time.

But data from companies that pursue blockchain payments indicate that good players are only small players. At the beginning of this year, the blockchain analysis platform Chainalysis broke up, where exactly the funds sent to mixers originally come from. It is not surprising that "illegal sources" are the overwhelming source of money for mixers.