U.S. Office of Foreign Asset Control

‘Concerning precedent’ — bloXroute Labs’ MEV relays to reject OFAC blocks

December 19, 2023 Coin Telegraph

Tornado Cash indictment fails to show ‘clear violation’ of certain laws: Coin Center

August 24, 2023 Coin Telegraph

Coin Center research director Peter Van Valkenburgh argued that crypto mixer Tornado Cash is an anonymizing software provider, not a money transmitter.

Crypto advocacy group Coin Center has criticized the latest indictment of two former Tornado Cash developers, arguing that the facts offered don't show any clear violations of money-transmitting-related offenses.

Roman Storm and Romen Semenov were indicted by the United States Office of Foreign Asset Control (OFAC) on Aug. 23 for conspiring to operate an unlicensed money-transmitting business, among other charges.

In a follow-up opinion piece, Coin Center research director Peter Van Valkenburgh argues that the claims in the indictment appear to run counter to guidance from the U.S. Financial Crimes Enforcement Network — arguing that Tornado Cash only provides the software to transmit money, rather than transmitting the money itself.

New Tornado Cash indictments seem to run counter to FinCEN guidance

Coin Center’s initial thoughts on a case that could potentially criminalize the publication of software codehttps://t.co/YCBv3vsZAE
— Neeraj K Agrawal (@NeerajKA) August 23, 2023

"The only thing the indictment claims regarding the defendants’ unlicensed money transmission is that they 'engaged in the business of transferring funds on behalf of the public' and did so without registering with FinCEN," wrote Valkenburgh.

But does the indictment state any facts that actually show that the defendants engaged in any activities that qualify as money transmission under the relevant law?

He pointed to an interpretation by FinCEN as to what constitutes “money transmission services” under the U.S. Bank Secrecy Act, which states:

“An anonymizing software provider is not a money transmitter.”

*An excerpt from FinCEN’s Virtual Currency Guidance from 2019. Source: FinCEN.*

Valkenburgh then referred to another excerpt stating that only people using the software can be considered money transmitters:

“[A] person that utilizes the software to anonymize the person’s own transactions will be either a user or a money transmitter, depending on the purpose of each transaction.”

While Valkenburgh said that Tornado Cash made it easier for individuals to use the protocol’s smart contracts to transmit money, he argued it doesn’t mean that the developers were money transmitters themselves.

“[But] that doesn’t somehow mean that they became transmitters merely because they provided tools that others used to transmit their own money,” Valkenburgh explained.

Valkenburgh also criticized claims in the indictment suggesting that Storm and Semenov had complete control over the protocol’s smart contracts.

“Ethereum smart contracts are variable and sometimes people have no control over their operation, some control, or total control. This is the key fact needed to determine whether one is performing money transmission, he argued.

Coin Center first voiced its opposition toward the U.S. Treasury in October when it sued the agency for its unprecedented and unlawful sanctioning of Tornado Cash.

The OFAC indictment claims Storm and Semenov ran an unlicensed money transmission service by engaging in the business of transferring funds on behalf of the public. The enforcement agency claimed the developers should have registered with FinCEN.

Semenov was added to OFAC’s list of Specially Designated Nationals and Blocked Persons on Aug. 23, while Storm was arrested by the Federal Bureau of Investigation in Washington state on the same day.

Alexey Pertsev, another one of Tornado Cash’s founders, was imprisoned by Dutch authorities in Aug. 2022 before being released in late April.

Valkenburgh believes the outcome of the Tornado Cash saga will have a profound impact on the legal rights of United States citizens to build and publish software in the future.

Magazine: Magazine: Tornado Cash 2.0 — The race to build safe and legal coin mixers

Coinbase supports new court action to remove Tornado Cash ban

April 6, 2023 Coin Telegraph

Alexey Pertsev

The motion is part of a broader effort to restore internet privacy rights for U.S. citizens.

The United States Treasury faces a renewed legal challenge that aims to overturn the decision to sanction the crypto mixer Tornado Cash from six individuals backed by cryptocurrency exchange Coinbase.

A motion for a partial summary judgment was filed on April 5 in a Texas District Court, the Coinbase-backed plaintiffs moved for the U.S. Office of Foreign Asset Control (OFAC) to settle for the first two counts from its original complaint filed in September 2022.

If granted, it would see the Judge rule on some of the factual issues while leaving others for the trial.

The counts claimed OFAC exceeded its statutory powers under the International Emergency Economic Powers Act (IEEPA) and violated the Free Speech clause under the U.S. Constitution’s First Amendment.

A few months ago, Coinbase backed a legal challenge to sanctions imposed by the US govt against Tornado Cash. Today the plaintiffs filed a motion for summary judgment, asking the court to reopen TC for all. Their arguments are simple but powerful. 1/10 https://t.co/xSngWKxM3x
— paulgrewal.eth (@iampaulgrewal) April 5, 2023

The plaintiffs firstly claimed OFAC breached a section of the IEEPA that allows the Treasury to take action against the property in which a foreign country or foreign national has an interest.

The motion argued that as the provision only allows the pursuit of property-related action against a foreign “national” or “person,” it doesn’t apply to open-source software.

To strengthen its claim, the plaintiffs argued the 20 or so smart contracts that provide the functionality to Tornado Cash should not be considered property under IEEPA because they cannot be owned:

“An immutable smart contract is incapable of being owned, it is not property and the Department lacks authority under IEEPA and the North Korea Act to prohibit transactions with those smart contracts.”

“No one has the right to alter them. No one has the right to delete them,” they added.

The second main argument put forth is that by banning the open-source code, OFAC is violating the Free Speech Clause of the First Amendment under the U.S. Constitution.

The plaintiffs noted OFAC has authority to take action against “crypto thieves” like North Korea’s Lazarus Group, but a “total prohibition is thus grossly disproportionate” as money laundering only accounted for 0.05% of crypto transactions in 2021.

“To ban all uses of Tornado Cash is akin to banning the printing press because a tiny fraction of users might publish instructions on how to build a nuclear weapon,” they added.

The motivation behind the motion is part of a broader effort to restore internet privacy rights for U.S. citizens, the plaintiffs explained. It is the most recent filing since the individuals first sued the U.S. Department of Treasury in September.

The six plaintiffs behind the filing are Joseph Van Loon, Tyler Almeida. Alexander Fisher, Preston Van Loon, Kevin Vitale and Nate Welch. The filing details most of the group had previously interacted with Tornado Cash.

The legal battle comes as Alexey Pertsev, the creator of Tornado Cash, faces his own in The Netherlands. He has been held since Aug. 18 on a series of money laundering charges.

Magazine: Unstablecoins: Depegging, bank runs and other risks loom

‘Not even a single TX has been censored on ETH’ — Cyber Capital founder

October 18, 2022 Coin Telegraph

Anthony Sassano

Bons noted that even with 50% OFAC compliance among Ethereum validators, blocks will still be produced within 30 seconds.

Ethereum bulls have hit back against claims the network has become prone to censorship post-Merge, with one arguing that “not even a single” transaction has been censored on the network.

In a 19-part thread to his 29,100 followers on Oct. 17, Cyber Capital founder and CIO Justin Bons argued that contrary to “what some Bitcoiners are falsely claiming,” not a single transaction on Ethereum has been stopped as a result of Office of Foreign Assets Control (OFAC) sanctions.

Bons was referring to recent reports suggesting Ethereum has become too reliant on OFAC-compliant Miner Extractable Value (MEV)-Boost relays since the Merge.

Last week, it was reported that more than 51% of Ethereum blocks are now complying with the U.S. sanctions after transitioning to proof-of-stake (PoS).

The crypto-fund manager argued that despite the increasing presence of OFAC-compliant MEV-Boost relays, it only becomes censorship when producers refuse to build on non-compliant blocks, though that would result in forking and splitting of the chain, explaining:

“Even with 50% OFAC compliance, a non-compliant ETH TX will be confirmed within 30 sec! Compared to BTC's more variable 10min!”

Bons further argued it only takes one contributing validator to include what may be an OFAC-sanctioned transaction in the canonical chain.

“This means that a very small minority of validators/miners can counter such censorship over both ETH & BTC! Easily less than 1% can prevent censorship,” he explained.

Having attributed most of this backlash to “Bitcoiners,” Bons also argued that Ethereum with its new PoS consensus mechanism is “less vulnerable” and “far more secure” than Bitcoin under proof-of-work (PoW) because institutional players are not economically incentivized to try split the chain.

Ethereum developers have also working to improve Ethereum’s censorship resistance too — with Ethereum developer Terence Tsao of Prysmatic Labs on Oct. 17 announcing that he and fellow developer Marius van der Wijden had begun building a solution to address the issue:

Together with the legend @vdWijden, we have started prototyping features to enable the proposer to select between a local block and a builder block with the highest fee.
The first step for censorship resistance️https://t.co/HyzUBZuB6V https://t.co/GGuAIegW5H
— terence.eth (@terencechain) October 17, 2022

Ethereum co-founder Vitalik Buterin recently proposed a Partial Block Auction solution, where a block builder only has the right to decide some of the contents of the block.

Ethereum research and development organization Flashbots is also looking to soon roll out its fully decentralized and EVM-compatible block builder — Single Unifying Auctions for Value Expression (SUAVE) – in order to combat censorship issues.

Ethereum protocol upgrades in order of importance over the next 6-12 months:

- Beacon Chain withdrawals
- PBS/crLists/related censorship-resistance upgrades
- Proto-danksharding (EIP-4844)

Just my humble opinion - censorship resistance is more important than scaling right now
— sassal.eth ️ (@sassal0x) October 15, 2022

On Aug. 8, the United States Treasury Department added more than 40 cryptocurrency addresses allegedly connected to controversial mixer Tornado Cash to the Specially Designated Nationals list of OFAC, effectively barring U.S. residents from using the mixing service.

U.S. Office of Foreign Asset Control

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