Is the Storm Over for Tornado?
Body: Wow!! Tornadoes. The word conjures images of flipped over mobile homes, people clamoring to be the MOS interview, and the ambulance-chasing crew parachuting in to capitalize on other peoples’ suffering. They do however, follow a pretty clear rhythm: There’s a certain excitement pre-storm, and it often ends in disaster. So, it begs the question, Wasn’t Tornado Cash REALLY well-named?
So, what was (or is?) Tornado cash?
Tornado cash was a mixer. Recall that a mixer will take bits and pieces of different transactions and mix them together, in an effort to occlude the source and target of the funds. The Office of Foreign Assets Control (OFAC) claims that Tornado helped to launder over $7 Billion, including $455 Million for the North Korean elite. One official said the following:
“Today, Treasury is sanctioning Tornado Cash, a virtual currency mixer that launders the proceeds of cybercrimes, including those committed against victims in the United States,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson. “Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”
So, what was the sentence?
Ok, first a definition that I had to look up. The word “blocked” does not mean constipated in this forum. If a n account is blocked (because of association with a blocked person) then that money is held, inert, in an interest-bearing account. Then, the person can directly petition the OFAC to be “unblocked.” That said,largely, the sanctions say that a lot of assets are essentially frozen. Any assets of Tornado Cash are blocked, and if any corporate assets are held by an individual, these too are blocked, and must be reported to the OFAC. It even makes it illegal to provide any goods or services to any “blocked” individuals. (Ostensibly, if they own a dog, their kibble is blocked too.) If the petition is successful, they are removed from the Specially Designated Nationals l(SND) list. In other countries, some individuals were arrested for unknown charges
One professor, Dr. Matthew Green, was sanctioned for his holding of Tornado Cash. In support for his petition, the authors sent OFAC a letter explaining that Professor Green uses this account to explain the impact of anonymity on cryptocurrency transactions. This letter did not get him out of sanctions, but, OFAC did issue some new guidance in the form of an FAQ (answering some of their questions, and leaving others unanswered) and the correspondence in timing did seem suggestive. Answer #1076 seemed particularly on-point when they specifically made provision for the underlying code to be discussed in an academic setting, so, Professor Green might be spared here.
OFAC is not the only one who arrived guns a-blazing. CoinBase and CoinCenter brought separate actions against the OFAC. Their claim is that OFAC violated the Constitution when they sanctioned TornadoCash. Several other suits revolve around similar issues. The OFAC opined that the illicit usage of this coin out-paced the permissible reasons. The supporters of cryptocurrency say that these prosecutions serve to stifle financial innovation, and cite for proof, how the code itself was banned.
Is this really a big deal?
Yes, it is. According to a report by Chainalysis, 23% of monies received by mixers come from accounts associated with illicit activities. This is why the U.S. Government is clamping down so hard on these services. But, as they do, they inevitably affect other perfectly legal money sources.
The Verdict
The only verdict I can see here is to make sure that your investments pass the “smell test.” If you are interested in investing in a cryptocurrency that prides itself on privacy over everything else, understand that this might draw the ire of officials, and this does act as a source of risk (“rightly” or not.) The reality is as it is, and you have to make investment plans with both eyes wide open.
REFERENCES
An Update on Tornado Cash | Electronic Frontier Foundation (eff.org)
Tornado Cash Sanctions By U.S. Treasury Draw Outrage, Suits From Crypto Community (forbes.com)
Tornado Cash Sanctions: What Crypto Investors Need to Know – NerdWallet
REFERENCES
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.