Big Crypto Firm Tether Defies US Sanctions Over Service That Hid Stolen Assets

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The latest effort by the US government to crack down on the illicit use of cryptocurrency by rogue foreign regimes and criminals is meeting resistance from the industry itself, including one of its most important players and the most influential.

Earlier this month, the Treasury Department sanctioned Tornado Cash, a cryptocurrency service it says allowed North Korean hackers and others to launder billions of dollars in digital assets stolen in virtual burglaries. Typically, sanctions target individuals, countries or companies, and US companies comply by ensuring that they avoid doing business with them.

But the penalties for Tornado Cash are new. Tornado Cash is known as a mixer, hiding the source of digital assets by bundling them together before users withdraw them. It exists as software code on a decentralized, worldwide network of computers, and its authors have written it in such a way that even they cannot modify it. Crypto Industry Leaders Say They’re Insecure what they need to do to stay on the right side of the law.

“More than anything else right now, we’re an industry in need of guidance,” said Ari Redbord, a former treasury official now with TRM Labs, which provides crypto firms with tools to monitor fraud and corruption. financial crime.

A Crypto Firm That Attracted meticulous examination on our side regulators and law enforcement in the past, Tether, may be in violation of new Treasury rules. According to a Washington Post analysis of data from Dune Analytics, a cryptographic intelligence firm, Tether does not blacklist accounts associated with Tornado Cash.

So far, the US government has done nothing. “Tether has not been contacted by U.S. officials or law enforcement with a request” to freeze transactions with Tornado Cash, Tether Chief Technology Officer Paolo Ardoino said in a statement, adding that the company is “normally complying with requests from US authorities”.

Tether issues the world’s largest stablecoin, a dollar-pegged token that helps form the engine of the global crypto economy. Investors use it to buy and sell other digital assets and as collateral for certain transactions.

It is unclear whether Tether is legally obligated to comply with Treasury sanctions. The Hong Kong-based company suggests that is not the case, as it “does not operate in the United States or onboard American people as customers,” Ardoino said. But he said the company views the Treasury sanctions “as part of its world-class compliance program.”

to others timeTie frames have claims the company is supervised by the Treasury since it is registered with the Financial Crimes Enforcement Network, an office of the department which fights against illicit finance.

When asked if Treasury considers Tether to be in violation of Tornado Cash sanctions, the department declined to comment.

Sanctions experts said the issue was moot. The restrictions “generally apply to all U.S. nationals or corporations, or any person or organization in the United States or doing business in the United States, or any transaction affecting the United States,” said Scott Anderson, former State Department adviser at the nonpartisan Brookings Institution. said in an email. “I don’t know if Tether fits into that or not. But if there’s a chance they (or their employees) will, non-compliance could lead to real legal risk.

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A former senior official with the Treasury’s Office of Foreign Assets Control (OFAC), which enforces the sanctions, said Tether was treading dangerous ground.

“It’s never a very good idea to test OFAC. Right now is a particularly tough time for any crypto-related business to do that,” the former official said. “Looks like they’re doing that.”

Tether’s response, and the ambiguity surrounding it, highlights the firestorm the Treasury has unleashed with its latest attempt to thwart the criminal misuse of digital assets.

Cryptocurrency developers have long been divided on whether they are just working on innovative financial technology or part of an explicitly political attempt to create a parallel financial system beyond the reach of government control.

But crypto executives largely agree that the Treasury overstepped its Aug. 8 announcement against Tornado Cash, which they portray as an unprecedented targeting of computer code, rather than a person or entity typically victimized by sanctions. Some argue that the penalties may be unconstitutional — and could be an attempt to open up a broader attack on the privacy protections offered by their technology. Many try to determine how to comply and resist the decision.

A Treasury spokesperson stressed the urgent need for the department to act, noting in a statement that Tornado Cash “has been used to launder billions of dollars for criminals and other illicit actors.”

The Treasury Department is working with industry representatives “to monitor the effects of this action and issue guidance as necessary,” the spokesperson said.

Roman Semenov, co-founder of Tornado Cash, wrote in a direct Twitter message to The Post that the penalties will “certainly deter many people” from using the service.

Some Tornado Cash users can innocently deposit legitimately acquired cryptocurrency and withdraw it to make untraceable charitable donations – as Ethereum co-founder Vitalik Buterin claims have done to contribute to Ukraine’s war effort. Depending on the moment, the transactions of certain users may have helped North Korean-affiliated hackers cover their tracks. In June and July, 41% of funds passing through the service were linked to hacks and other thefts, according at TRM Labs, a blockchain analytics company.

Tether has a history of racking up penalties from regulators. In 2021, he paid $18.5 million to settle charges from the New York Attorney General’s office that he lied about the composition of the assets backing his stablecoin, known as USDT. The company paid an additional $41 million later that year to settle similar allegations from the Commodity Futures Trading Commission.

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And he once neglected to comply with US sanctions against a crypto program. A Post analysis in April found that Tether continued to allow transactions with accounts allegedly belonging to Chatex, a Moscow-based digital asset exchange that the Treasury sanctioned last year. Since Tornado Cash was sanctioned this month, $5,000 worth of USDT has been deposited with the mixer, according to analysis by The Post.

Tether’s closest competitor, Circle Internet Financial, has taken a different approach. The day after the sanctions announcement, the US-based company said it had decided to comply by freezing $75,000 of its stablecoin, USD Coin, in Tornado Cash wallets and blocking transactions with blacklisted accounts.

Still, Circle chief executive Jeremy Allaire criticized the Treasury’s decision, writing on Twitter that he “crossed a major threshold in internet history”. He said the sanctions raise “extraordinary questions about privacy and security” and would invite “more brutal enforcement action if we don’t act now.”

Coin Center, a crypto think tank and advocacy group, went further. The organization said it was considering a legal challenge. The ruling “potentially violates constitutional rights to due process and free speech,” Jerry Brito and Peter Van Valkenburgh of the Coin Center wrote in a blog post last week, adding that the Treasury “has failed to act adequately to mitigate the foreseeable impact its action would have on innocent Americans.” Coin Center declined to comment further.

Tornado Cash is set to run automatically, and it cannot be changed or stopped. “It’s like yelling at a vending machine,” said Michael Mosier, former head of the Treasury’s Financial Crimes Enforcement Network, who is now general counsel at crypto privacy firm Espresso Systems. “That’s not the way to do behavior change, so it won’t affect the national security objectives for which the system was put in place.”

Tornado Cash has already seen a steep drop in the crypto it trades since the sanctions took effect. Daily deposits to the program have grown from around $7 million worth of Ethereum in the first week of August to around $2 million since the mixer was sanctioned, according to data from Dune Analytics. As traffic to the mixer dries up, say crypto analysts, the tool becomes less useful for illicit actors, who need a large pool of crypto to effectively hide the assets they send there.

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