FT Cryptofinance: Crypto, sanctions and the First Amendment

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Welcome to this weeks edition of the FTs Cryptofinance newsletter. Today, were looking at crypto mixing services and rights enshrined in the US Constitution.

The hallowed First Amendment probably wasnt the territory the US Treasury had in mind when it imposed sanctions on crypto mixing service Tornado Cash this summer.

In August the department had enough of Tornado, claiming it was used to launder more than $7bn and being a channel of choice for North Korea-backed hackers to evade sanctions. Mixers such as Tornado obscure the trail of transfers that would typically be publicly accessible on the digital ledgers that underlie cryptocurrencies.

The results were pretty tough. All transactions passing through Tornado Cashs virtual desk were blocked if they involve US users or are conducted anywhere in or through the country. Everyone got the message: if youre American, dont go near it.

Crypto purists were predictably less than impressed, claiming familiar grievances such as government over-reach and the trampling of individuals financial privacy rights.

Theyre now taking their complaints a step further. This week Coin Center, a crypto-focused non-profit research and advocacy group based in Washington, filed a lawsuit against the Treasury and its Office of Foreign Assets Control (Ofac), alleging it does not have the authority to impose sanctions on Tornado Cash .

It has been joined by crypto investor David Hoffman, software developer Patrick OSullivan, and John Doe, who was described in the filing as a human-rights activist who has been donating crypto to Ukraine.

Will Coin Center get anywhere with suing one of the worlds most powerful financial crime agencies? And if not, why even bother?

The lawsuit didnt really address the substance of the Treasurys allegations: that Tornado was being used as a channel for money laundering.

Instead, Coin Centers case revolves around its view that they are protected by the First Amendment, which protects the rights of groups (and individuals within them) to exercise free speech. The criminalization of Tornado Cash, the plaintiffs allege, violate the constitutional rights of users who need it to protect their private associations. John Doe fears Russian agents would learn of his pro-Ukrainian activity and harm him and his family.

This line of attack might not be enough. Im quite skeptical of the First Amendment claim…I dont think there is precedent to support a right to make fully anonymous donations through a particular currency, Peter Fox, partner at Scoolidge, Peters, Russotti & Fox, told me over email.

Admittedly, Coin Center does not help itself. It asserts that it is not a criminal, and never transacts with criminals or terrorists. Yet it also says: It is impossible to tell whose assets are being sent to Coin Centers account when they come from a Tornado Cash address. Coin Center declined to comment on how these statements can coexist.

Fox said private associations can be maintained without the use of Tornado Cash, or any other crypto mixing service. Why don’t you cut them at check? That’s pretty private.

Coin Centers strongest position may be its allegation that the Treasury and Ofac have overstepped their remit because Tornado Cash has also been used for payments between ordinary Americans just wanting to pass clean cash between each other, privately. Fox said that point could be a problem for the government.

Maybe the battle is not over the present but the future. Whether Coin Center is successful or not, it would only enhance our blockchain laws and policy to increase public discourse around open source software tools generally, including those like Tornado Cash, said Teresa Goody Guilln, partner at US law firm BakerHostetler.

But perhaps, as Americas Founding Fathers knew, some truths are self-evident.

As John Reed Stark, former chief of the SECs Office of Internet Enforcement, told me this week: The industry constantly screams out for regulatory clarity, for certainty, for specifics, but whenever they get it they file a lawsuit saying its not what they like .

Whats your take on Coin Centers case against the Treasury? Email me at [email protected].

Weekly Highlights

As the saying goes: when it rains it pours, and Solana-land is very wet. Last week I asked where the network would go after a swath of recent failures, and this week Solana-based DeFi platform Mango Markets was hacked for $100mn. As it joined the ever-lengthening list of DeFi hacks, the Mango Markets team clarified that oracle price reporting worked as it should have a detail that will surely inspire much confidence in the alleged future of finance.

France made crypto headlines again this week after welcoming exchange platform Crypto.com to its shores. The platforms registration as a Digital Asset Service Provider under the Autorit des Marchs Financiers (AMF) follows Binances registration in the EU member state months earlier.

Meta continues to push the limits of technology. If youre planning on moving your life to Meta Horizon Worlds, you can look forward to…*checks notes*…having legs. One observing Twitter user pointed out that Madden, a popular American football video game, achieved the same feat in 1994, which I feel takes the legs out from beneath Metas latest innovation.

Scrutiny over cryptos apparent role in blunting economic sanctions isnt going away. This week exchange platform Bittrex agreed to pay $29mn to settle enforcement cases with US authorities for apparent violations of sanctions against countries such as Iran, Cuba and Syria. Read about it here.

Binance has been accused by the co-owner of a UK subsidiary of filing a grossly inaccurate annual report for a British entity associated with the crypto exchange. The accusation comes following Binances public spat with the Financial Conduct Authority last year. Read more here.

Soundbite of the week: Tether

The undetailed commercial paper that backed the worlds biggest stablecoin has long attracted speculation. No more.

Tether is proud to announce that we have completely eliminated commercial paper from our reserves. This is evidence of our commitment to back our tokens with the most secure, liquid reserves in the market.

Nothing to do with the 4.4 per cent interest on offer in short-term US Treasuries, then? Lets hope this accelerates the long-awaited audit too.

Data mining: Coinbase continues

Whether it is job cuts, internal strife or spats with regulators, 2022 has been a difficult year for Coinbase.

Recent data published by analytics platform CryptoCompare show momentum is yet to turn round as it prepares to announce third-quarter earnings on November 3. Monthly spot trading volume on the exchange was down 17 per cent to $48bn compared with $120bn at the start of the year. Spot trading volume has now hit its lowest point since December 2020.

Additional data from CryptoCompare show that monthly spot trading volume for Binance, FTX and OKX increased during the same period.

Perhaps the documentary on Coinbase and its co-founder Brian Armstrong will change peoples minds. Mind you, The Atlantic wasnt a fan.

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