On August 8, the U.S. Department of the Office of Foreign Assets Control (“OFAC”) sanctioned “notorious” virtual currency “mixer” Tornado Cash, which allegedly has been used to launder more than $7 billion worth of virtual currency since its creation in 2019. Tornado Cash is a virtual currency mixer that operates on the Ethereum blockchain. Tornado Cash receives a variety of transactions and mixes them together before transmitting them to their individual recipients. The stated purpose of such mixing is to increase privacy, but mixers are often used by illicit actors to launder funds because the process enhances anonymity and makes it very hard to track the flow of funds. According to the Treasury Department press release, “[d]espite 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 risk.” This statement seems to imply that Tornado Cash is run by actual people – an implication that is at the heart of the controversy over these sanctions, as we will discuss.
The sanctions against Tornado Cash have elicited enormous controversy in the crypto world because, some argue, (1) Tornado Cash is not an entity run by actual people, but is merely code; and (2) although OFAC has the legal authority to sanction people and entities, it lacks such authority to sanction code or a technology – or at the very least, such sanctions create many practical problems for innocent actors, including in ways which no one has foreseen fully. As we discuss, even a member of the U.S. House of Representatives has waded into the controversy this week, questioning the ability of OFAC to issue the sanctions and demanding answers. The controversy also reflects that, once again, whether one chooses to focus on the word “privacy” or on the word “anonymity” typically reflects an a priori value judgment predicting one’s conclusion as to whether something in the crypto world is good or bad.
Indisputably, the Tornado Cash sanctions are, to date, unique and unprecedented. Although they may turn out to be an outlier experiment by OFAC, public pronouncements by the U.S. Treasury Department strongly suggest that, to the contrary, they represent part of the future of crypto regulation, in which the enormous power of the U.S. government to issue broad sanctions obliterates legal and practical hurdles which could stymie other agencies, such as the Financial Crimes Enforcement Network (FinCEN). This may be because, ultimately, the government actually agrees that no person is in control of a powerful technology that has easy application for malicious uses, and that is precisely the problem.