The crypto industry has been reeling since the US Treasury blacklisted decentralized crypto mixer Tornado Cash on Monday.
Despite Treasury sanctions formally being limited to US persons and entities doing business in the US, those definitions have expanded wildly in the past quarter century to cover non-Americans. The move to designate a smart contract as a sanctioned entity drew widespread criticism from crypto advocates.
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The Dutch Belastingdienst’s arrest of Alexey Pertsev this past week drew particular ire from this group. Though the details of the agency’s charges against Pertsev are limited, that action seems to be a major escalation in global enforcement against decentralized protocols. Specifically, a move by government agencies to find criminality in a programmer producing code.
“This cannot become a precedent, where the technology itself is what’s on the docket,” Circle’s Dante Disparte said on an August 12 Twitter space featuring many high-profile figures in crypto policy.
The arrest happened in the Netherlands, rather than the US, where the concept of precedent is different — critically, civil law rather than common law. But also critical is what Crypto Council for Innovation CEO Sheila Warren called “the expansion of what it means to be a US person.”
Secondary sanctions on Iran are a particularly contentious example. This is where US people and entities businesses cannot do business with folks who do business with Iranian entities. But the expansion into the world of smart contracts is new and particularly concerning to DeFi market participants.
The immediate impact of this widening definition has triggered widespread fear that other decentralized protocols around the world could be impacted. Many DeFi platforms have already reacted to heightened scrutiny over the past year by blocking front-end access to sanctioned geographies or users associated with sanctioned addresses, including Uniswap, 1inch, and even Tornado Cash itself. Since the smart contract designation, Oasis and Aave have joined them.
Scopelift’s Ben DiFrancesco suggested that if North Korea had used, for example, leading decentralized exchange Uniswap, authorities would have gone for Uniswap in the same way as Tornado Cash — targeting frontends, sites hosting code and even the developers themselves. Representatives for Uniswap declined to comment for this article.
Was the arrest coordinated?
It’s unclear if the Treasury had interactions with the Belastingdienst and other international agencies that might pursue Tornado Cash and similar protocols. When contacted by The Block, a representative for the Treasury’s Office of Foreign Asset Control would not confirm or deny Treasury involvement in Pertsev’s arrest.
However, the Biden administration spent much of 2021 shoring up international agency relationships to pursue ransomware actors. This resulted in a number of arrests internationally.
Currently with blockchain analytics firm TRM Labs, Ari Redbord was a US attorney and a Treasury advisor involved in prosecuting many of the highest-profile cases in crypto to date.
“Often these types of actions are coordinated, but I don’t know about this one specifically,” Redbord told The Block. “One thing I can say is that the most impactful cryptocurrency investigations — from Bitfinex to Welcome to Video, Helix to Hydra — all involved high-level international cooperation.”
Helix was an early example of US authorities shutting down a Bitcoin mixer by prosecuting its operator.
“I believe we will see a coordinated effort among countries who have been attacked by these ransomware gangs or who are prone to attack,” Bill Callahan, a former DEA agent and current government affairs leader at Blockchain Intelligence Group, told The Block. Law enforcement, he continued, “will look to bring charges against anyone who aids and abets the criminal organization such as money launderers and those that provide services to launder and obfuscate financial transactions.”
Tornado Cash co-founder Roman Semenov told The Block that neither he nor his team received any notice from OFAC prior to the sanctions.
When asked what this meant for non-US users, Semenov replied, “We’ll see.”
© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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