Crypto pushes back on Tornado Cash crackdown
Good morning, and welcome to Protocol Fintech. This Friday: a Tornado Cash update, Gensler on Capitol Hill, and winners of the Merge.
The Tornado Cash storm
Crypto has been pushing hard against the Treasury Department’s Tornado Cash crackdown, which the industry largely denounced as a sweeping move that doesn’t make sense. Not only is the blanket ban controversial, but supporters say imposing a ban on the widely used software would be impractical, if not impossible.
The counteroffensive may be working: The federal regulator appears ready to temper its anti-Tornado Cash campaign.
Tornado Cash isn’t just for criminals. But that’s what the new rule announced by the Office of Foreign Assets Control implied, citing the open-source software tool’s role in money laundering and other crimes.
- But the OFAC rule is too broad. The regulator strongly suggested that any crypto transaction that goes through Tornado Cash is innately illegal — which is simply insane, crypto advocates argue.
- Yes, criminals use Tornado Cash, but so do many regular, law-abiding citizens, according to crypto advocates. And in some cases, they may not even be aware that their assets “touched” Tornado Cash.
- To underscore this point, Tornado Cash users protested the OFAC rule by unleashing a “dusting” campaign, sending small amounts of crypto processed through Tornado Cash to unsuspecting high-profile crypto holders such as Jimmy Fallon and Brian Armstrong.
- Mike Fasanello, who is critical of crypto executives who urge the industry to simply ignore the OFAC rule, said the “dusting” campaign was a way of telling OFAC: “What now? Will you prosecute these parties?”
- “This was a case where OFAC went after a fly with a hammer, missed and hit a bystander’s finger,” Fasanello, chief compliance officer of LVL, added.
That said, the ban isn’t as draconian as some critics feared. The sanction backlash, which includes a Texas lawsuit bankrolled by Coinbase, apparently prompted OFAC to clarify its Tornado Cash rules.
- OFAC’s new guidelines essentially say there will be situations in which Tornado Cash transactions will not automatically be deemed illegal and prosecuted. “Interacting with open-source code itself, in a way that does not involve a prohibited transaction with Tornado Cash, is not prohibited,” the agency said.
- Crypto holders who need to complete Tornado Cash transactions that were initiated before the OFAC sanction “may request a specific license to engage in transactions involving the subject virtual currency.”
- The agency even addressed “dusting,” saying some individuals “may have received unsolicited and nominal amounts of virtual currency or other virtual assets from Tornado Cash.” Those technically are covered by the sanction, but the agency “will not prioritize enforcement” so long as they involve “no other sanctions nexus.”
- OFAC also noted that “teaching, sharing, or writing about the code is not subject to sanctions, clarifying that it is the use of Tornado Cash which is prohibited,” William Callahan, director of government and strategic affairs at Blockchain Intelligence Group, told Protocol.
“These guidelines are very narrow,” Greg Kidd, founder of VC firm Hard Yaka, told Protocol. But, he added, the clarification on dusting and “the notion that OFAC won’t prioritize enforcement against these marginal circumstances" are positive steps. In fact, Callahan said he thinks OFAC’s Tornado Cash sanction “will probably lead to more acceptance” of the software even as it leads to “increased scrutiny on its use.”— Benjamin Pimentel (email | twitter)
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On the money
On Protocol: The Biden administration is offering a deeper look at its crypto game plan.
The DOJ is boosting its crypto crime-fighting team. The Justice Department has tapped more than 150 federal prosecutors across the country to bolster law enforcement’s efforts to combat the rise in crime linked to the use of cryptocurrencies such as bitcoin.
Crypto-focused open banking startup TrueLayer cuts 10% of staff. The London-based firm laid off about 45 employees, citing market conditions.
Tech workers laid off in crypto winter are bouncing back quickly. Other crypto firms, tech companies and financial heavyweights are all still hungry for tech talent despite the recent run of layoffs.
SEC chair Gary Gensler reaffirmed before the Senate Banking Committee his belief that bitcoin is not a security, unlike “a vast majority” of other cryptocurrencies. With bitcoin, Gensler said, “there's no group of individuals in the middle. So investing public's not betting on somebody in the middle.”
“And we finalized!” Ethereum co-founder Vitalik Buterin crowed in a tweet as the crypto network’s much-anticipated shift to a proof-of-stake system was completed. “Happy merge all. This is a big moment for the Ethereum ecosystem.”
The Ethereum Merge, which finally happened this week, gave Coinbase and Robinhood a much-needed boost over the past month.
Robinhood and Coinbase are still reeling from the crypto crash, which has wiped out about $2 trillion in value and caused their shares to plummet this year.
But excitement over Ethereum’s pivot from proof-of-work to proof-of-stake — which is expected to transform crypto’s second-biggest ecosystem — sparked a mini rally in the shares of the two major crypto marketplaces.
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Thanks for reading — see you Monday!