Congress

Our director of policy Jason Somensatto testified in both the House and Senate on cryptocurrency tax issues. He used his time to continue our long-running advocacy for fair treatment of block rewards and a de minimis exemption for day-to-day use of crypto.

The long-awaited “Market Structure” bill passed the House as The Clarity Act. Coin Center fought hard for the inclusion of strong developer protections in the bill and over the line to passage.

We are happy to report that a version of the BRCA is now included in the Senate Banking Committee’s digital asset market structure discussion draft (their analog to the CLARITY Act). Our top goal is keeping those protections in as negotiations unfold.

Read more: Senate market structure negotiations must not sacrifice hard won developer protections

Privacy Preserving Alternatives to KYC

Recognizing that crypto needs to bring solutions—not just critiques—to the AML debate, we’ve launched the John Hancock Project (JHP). The JHP will convene a small working group of cryptographers, developers, and civil liberties advocates to design and prototype alternative AML compliance mechanisms that protect privacy and individual autonomy.

Our goal is to demonstrate that data-minimized, privacy-preserving compliance is not only technically feasible but preferable—and to encourage the Treasury Dept. to formally recognize these approaches as valid under existing law.

By doing so, we aim to advance privacy research and unite the builder community around practical, principled solutions that make open blockchain networks safer and freer.

Read a summary: Digital Identity is broken. The tech to fix it is ready. Here’s how the government can help.

Read the full report: Tear Down this Walled Garden: American Values and Digital Identity

More Work

• The Treasury Dept. requested comments on innovative methods to detect illicit activities using stablecoins. Our submission explains that the combination of public blockchain transactions and traditional AML ultimately creates a panopticon worse than than any hypothetical CBDC might be. Read the full comment.

• In the “MEV Brothers” case, two brothers were charged with wire fraud for not acting as “honest validators” despite keeping in line with the rules of the Ethereum blockchain. Coin Center filed an amicus brief explaining to the court that this theory of law is inconsistent with the facts of how open blockchains function. Ultimately the trial ended in a mistrial as the issues at play were too complex for a jury, more proof that courts have no place in policing protocol rules. Read our brief.

• Inspired partly by that case, executive director Peter Van Valkenburgh gave a mainstage talk at Devconnect warning builders that base layer privacy is essential to protect validator operators and builders of substantive tools. Watch the talk.

Tax-deductible giving to Coin Center

Supporting our mission just got easier. Coin Center’s critical work defending the innovators building permissionless software has been made possible by the generous contributions of those in the community who believe in our mission.

We are pleased to announce the launch of our sister organization, CC Foundation, a 501(c)(3) nonprofit organization that provides an avenue for our supporters to benefit from tax-deductible charitable giving.

Learn more tax-deductible giving here.

First, the transition. As many of you may know, our beloved Jerry Brito and Robin Weisman have announced that they will be stepping down from their day to day roles at Coin Center. They will remain in the family and on the board of directors. We are eternally grateful to them for getting Coin Center this far.

Peter Van Valkenburgh will be stepping up as the new executive director. We are excited to continue delivering the high quality, no-nonsense, advocacy work you have come to expect from us for many more years.

Now on to the other transition. Many of you have asked how we are thinking about the incoming Trump administration. This is a complex question so we’ve laid it all out in a thorough blog post:

Read more: Coin Center’s Analysis of the Crypto Policy Landscape Following the Elections

To summarize, we think it’s likely that crypto businesses may have an easier time with their issues at the market regulators like the SEC and CFTC. However, we will remain vigilant on issues affecting the developers of decentralized protocols such as those affecting financial privacy and permissionless finance tools.

And in another blog post, we have succinctly laid out Coin Center’s priorities for the next Congress and administration. We’re often asked “what is it exactly that you want?" Well here it is in simple but detailed terms:

Read more: Coin Center’s Top Policy Priorities for 2025

Republicans have begun discussing tax changes for next year. We published an agenda of crypto-specific tax fixes that should be included in budget reconciliation.

Read more: If Budget Reconciliation is used for Tax Provisions, Crypto should be Included

On the topic of privacy tools, plaintiffs just won a Fifth Circuit case that parallels Coin Center’s case challenging OFAC’s sanctions on Tornado cash.

This is a huge victory. The court agreed with what we’ve been arguing since the sanctions were announced: immutable smart contracts are not property subject to sanctions. Coin Center had oral argument in our appeal before the Eleventh Circuit last month and we’ve now asked our panel to take notice of the Fifth’s opinion as well.

We’re still waiting to see what the final remedy will be in this series of cases. Ideally, the sanctions are vacated nationwide for all immutable Tornado Cash contracts, meaning Americans are free to use the core tool again and a lasting precedent will be set on the reasonable limits of OFAC’s authority.

We are especially thankful for Vitalik Buterin who made a substantial donation to Coin Center immediately following the ruling and which we will employ for related litigation.

Apart from the Tornado Cash civil case, there are ongoing criminal cases against the developers: Alexy Pertsev in the Netherlands and Roman Storm in the Southern District of New York. In Roman’s case we were disappointed to listen to the Court's legal reasoning in a hearing denying his motion to dismiss last October.

Particularly frustrating was the court’s refusal to give weight to either FinCEN’s guidance about non-custodial entities or to any First Amendment defenses. We have published a comprehensive blog post explaining why the court was wrong on the law.

Read more: Analysis: The disappointing denial of Tornado dev’s motion to dismiss

In other news, the Coin Center Annual Dinner 2025 has been announced. It will be held in NYC on September 25, 2025. Individual tickets are not yet available, but sponsorships are available and interest has already begun pouring in. Make sure to get your tables for what we hope will continue being the best party of the year.

Finally, Peter gave some talks recently that are worth checking out.

• The Parable of Clearville, the Land of Glass Houses - The importance of Tornado Cash told in the style of a children’s storybook. People really like this one.

• Why The World NEEDS Private Law - A keynote at Bankless Summit

• The Crypto-Shaped Hole in America’s Constitution - The Ethereum Cypherpunk Congress

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In recent filings, the DoJ has ignored longstanding FinCEN guidance that clearly exempts self custody software developers from regulation as money transmitters (and that matched Coin Center’s early recommendations). In essence, DOJ seems to be attempting to create new policy though criminal prosecution. 

Read more: DOJ’s New Stance on Crypto Wallets is a Threat to Liberty and the Rule of Law

A bill was introduced in Congress which would clarify that taxes on block rewards are not due at the time of acquisition, but instead upon their sale or disposition. The sensible policies this bill applies are in accordance with the nature of how tokens are created via staking, as well as proof-of-work networks, and match the recommendations Coin Center has made for years.

Read more: New Legislation Proposes Clear Tax Guidelines for Crypto Block Rewards

A new stablecoin bill in Congress attempts to create a regulatory framework for stablecoins. However, in seeking to prevent the next Terra type disaster, the bill’s language is overly broad. As written, it would ban all “algorithmic” stablecoins rather than limit itself to the flawed, centralized, model used by Terra. 

Read more: Senate Bill Risks Innovation and Free Speech with Stablecoin Ban

We filed an amicus brief in Roman Storm’s ongoing criminal case in the Southern District of New York. In this brief, we help the court cut through the vague and prejudicial description of Tornado Cash offered by the prosecution. 

We make clear that open source software developers cannot control the actions of others who happen to use their tools, and we argue that statutory and constitutional limitations to sanctions laws forbid the government from charging the Tornado Cash developers, or any similar open source developers, with conspiracy to evade sanctions.

Read more: Coin Center files court brief in defense of Tornado Cash developer

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This gala affair, held in Austin alongside the Consensus 2024 conference, is an opportunity for some of the best people to gather for what is reliably an uproarious good time. We hope to see you there. 

Individual tickets and sponsorship information are now available at coincenter.org/dinner

It’s been a busy start to the year for us.

We responded to a letter from Sen. Elizabeth Warren that seemed, to us, to be an unfair characterization of our work and an attempt to chill our right to petition our government. 

Read more: Coin Center says it won't answer Sen. Elizabeth Warren's letter and that it makes 'no apologies' for its work - The Block

We pointed out the new IRS reporting requirements for certain transactions over $10,000 went into effect in law on Jan 1, 2024. 

Read more: New crypto tax reporting obligations took effect on new year’s day

This caused some confusion as the IRS has neglected to provide guidance as to how this law will be applied in practice. The government’s attorneys, in our lawsuit over the rule, said this law is not in effect until they issue guidance. But that’s not what the law says. 

We explain further in Decrypt: Report Crypto Trades Over $10K to IRS or Face Jail? It’s Complicated

The IRS finally did use official channels to say that it did not expect persons to start reporting until they issued new rules.

All that said, we are continuing with our court challenge, as the rule in question is unconstitutional to begin with. 

We submitted a number of regulatory filings that the policy-minded among you may find interesting: 

• Comments in FinCEN’s rulemaking to define mixing as a Primary Money Laundering Concern 

• Comments in the CFPB’s rulemaking that would define “larger participants” in the “digital wallet” market. 

• Appellate brief in our suit against OFAC over Tornado Cash

• Amicus brief in case relating to IRS John Doe summons on exchanges

Finally, we appeared in a number of podcasts, any of which would make a good way to catch up on our work and how it related to the issues of the day.

• What Bitcoin Did - The Unconstitutional Attack on Privacy with Peter Van Valkenburgh

• CryptoOracle Collective - Daily Call with Jerry Brito 

• Galaxy Brains - The Senate Bill Coming to Kill Crypto w/ Peter Van Valkenburgh

• Coindesk TV - Coin Center Director of Research Reacts to Proposed IRS Broker Rules 

If you like our policy updates please consider forwarding this to a colleague.

You can support Coin Center’s mission at coincenter.org/donate.

Our director of research Peter Van Valkenburgh was interviewed by CoinDesk about this issue. Read the full transcript here. 

Our suit against the Treasury Department over OFAC’s sanctions designation of Tornado Cash smart contracts was dismissed by the district court. We believe the court incorrectly applied the statute, which requires a party to have “any interest … in property.” In our case, the court appears to argue that “any interest” at all is sufficient. Therefore, we will be filing an appeal to the Eleventh Circuit Court of Appeals. 

This is a disappointing result, but we always knew we would end up in appeals. If we had won, the government would no doubt have appealed itself, so we’re in the same place we would have been. We think ultimately this may be something that will have to make its way to the Supreme Court.

Also on the litigation front, we filed an amicus brief in Harper v. IRS, which challenges the John Doe summons that forced Coinbase to turn over the personal information of thousands of its customers to the IRS. Our brief explains to the court that by acquiring a list of individuals’ crypto addresses, the government is also acquiring the ability to see a complete picture of an individual’s finances without a warrant.

We filed a comment letter in the Treasury Department’s rulemaking on the definition of “broker” for third-party tax reporting purposes. 

In brief, we argued that the definition proposed by the Department is far too broad: It could compel mere software developers to collect sensitive personal information about the users of their software and report that information to the IRS. 

Our comment letter explains why that breadth runs counter to the clear statutory authority Congress set out in the Infrastructure Investment and Jobs Act, and also explains why such a broad standard would be an unconstitutional compulsion of speech and an unreasonable search and seizure of the records of both software developers and users of said software.

Our executive director Jerry Brito gave a talk to a group of developers on the state of play in Washington. If you’d like a roundup of where things stand with crypto in Congress and the agencies, it’s well summarized in this hour-long talk, which you can watch here.

If you like our policy updates please consider forwarding this to a colleague.

There were several developments related to Tornado Cash. The first is that the lawsuit sponsored by Coinbase and filed by several users of Tornado Cash (which parallels our own case) was dismissed by the court, and this fact was brought to the attention of the court in our case by the government. 

We believe our case is substantially different and remains in a strong position despite that dismissal. 

The next Tornado Cash development was the DOJ’s indictment of the protocol’s developers. We responded in a blog post analyzing the charges and find that they come dangerously close to criminalizing the publication of software code, and that they run counter to explicit guidance from FinCEN that anonymizing software providers are not money transmitters subject to Bank Secrecy Act obligations. I encourage you to read the whole post. 

Read more: New Tornado Cash indictments seem to run counter to FinCEN guidance

Subsequently, Cravath published a legal analysis that mirrors and concurs with our analysis that is also worth reading.

Lastly on Tornado Cash, in the course of his research, Peter Van Valkenburgh came across an OFAC-sanctions-related case (KindHearts v. Geithner) that may present a legal argument for those persons who have funds trapped at the sanctions Tornado Cash smart contracts to argue that they are subject an unconstitutional seizure. 

Read more: When does a sanction become a seizure? Lessons from the KindHearts case

Moving on from Tornado Cash, the Treasury Department and the IRS finally initiated a long awaited rule making to implement the crypto tax reporting provisions in the bipartisan infrastructure bill passed in November 2021. 

This includes regulatory interpretations of who qualifies as a “broker” obligated to do information reporting on their ‘customers’ to the IRS and what the content of those reports will be, etc. Coin Center will file comments and participate at the hearing. Stay tuned for further analysis. 

Finally, and also related to tax, we sent a comment letter in response to the information request by Senators Wyden and Crapo on digital asset taxation that I’ve previously mentioned here. Among other things, we stressed the importance of clarity, the need for a de minimis exemption from capital gains taxation, and that cryptocurrency block rewards from mining or staking on cryptocurrency networks should not be taxed as income when they are created.

If you like our policy updates please consider forwarding this to a colleague.

You can support Coin Center’s mission at coincenter.org/donate.

• The Financial Innovation and Technology for the 21st Century Act was passed out of both the Financial Services and Agriculture committees on a bipartisan basis. Previous drafts of the bill were ambiguous on whether publishing code could be a trigger for regulation. Our efforts not only clarified this, but resulted in a clear exemption. 

• The Clarity for Payment Stablecoins Act also incorporates our guidance that stablecoins comprised purely of software not be subject to covered by regulation.

• The Blockchain Regulatory Certainty Act has gone under the radar for some, but it would ensure in law a crucial protection for software developers and other non-custodial blockchain services (like miners and multisig providers) by creating a safe harbor and exempting them not only from money state transmission licensing, but also FinCEN registration. The idea was first proposed by Coin Center back in 2016 and we’ve been working with Reps. Emmer and Soto ever since to make it a reality.

This progress has been the culmination of years of engagement with Congress. We will continue our work to drive good bills forward and into law. 

Now for some bad news. The judge in our lawsuit against Treasury and the IRS over the crypto amendment to Section 6050I of the tax code granted the government’s motion to dismiss our case. In large part the basis for dismissal was lack of ripeness (i.e. suggesting we brought it too early since the law doesn’t go into effect until Jan. 1, 2024). 

We disagree with the judge’s opinion and consequently we’ve immediately filed notice of our intention to appeal to the Sixth Circuit Court of Appeals. 

This is a setback but we’re confident we’ll get our full day in court. In the meantime, you should be getting ready for the reality that starting Jan 1 recipients of crypto payments of $10,000 or more  in the course of business (broadly interpreted) will have to report to the government not just the transaction, but the PII of the sender as well–all without a warrant.

Senators Reed, Rounds, Warner, and Romney have introduced the Crypto-Asset National Security Enhancement (CANSEE) Act. While we understand the Senators’ desire to combat the abuse of crypto protocols by criminal and enemy actors, the bill would make the development of such protocols in the U.S. and by U.S. persons unfeasible. Worse, the bill would be unconstitutional legislation as it would clearly violate the First Amendment. We’re on the case and will do everything in our power to stop it. 

Read more: The CANSEE Act is a messy, arbitrary, and unconstitutional approach to DeFi

We published an episode of our Tangents podcast examining the court’s decision in SEC v. Ripple. 

Bottom line, we not only think it was the correct decision, but we note that the judge employed the exact framework for interpreting Howey in the context of crypto that we have been advocating for since we presented it to the SEC in 2016. Essentially, tokens are never investment contracts themselves but can be the subject of investment contracts. 

Coin Center in the News

• NBC News - A resurgent online betting market is boosted by crypto and current events

• Law360 - Crypto Suit Over Reporting Rule Tossed For Being Premature

• Decrypt - Coin Center Blasts 'Messy and Unconstitutional' Senate DeFi Bill

If you like our policy updates please consider forwarding this to a colleague.

You can support Coin Center’s mission at coincenter.org/donate.

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This month, the House Financial Services and Agriculture Committees are planning to mark up and send to the House Floor legislation regulating stablecoins and the issuance and trading of cryptocurrencies. This also follows a recent hearing on both topics (and another hearing where Federal Reserve Chair Powell concluded that cryptocurrencies like Bitcoin have "staying power"). 

Coin Center has been providing advice and input to Congress for the past couple months regarding these bills, and we will continue reviewing updated drafts to ensure that software developer's free speech rights are protected, and open, permissionless networks do not face unnecessary regulation.

Over in the Senate, Senators Lummis and Gillibrand are also working to reintroduce their comprehensive Responsible Financial Innovation Act, and they have been kind enough to solicit our thoughts. Support for cryptocurrency measures in the Senate will be key to any bill becoming law in the near future, and we look forward to continuing to work with Senators Gillibrand and Lummis as this bill advances.

On the litigation front, the government filed its cross-motion for summary judgment and response to our motion for summary judgment in our Tornado Cash case. You can see all court filings here. We will be filing a reply in the next couple of weeks and then it will be up to the judge to make a decision.

Coin Center in the News 

The Atlantic - Is Crypto Dead? 

“Some of these projects are potentially revolutionary,” [Jerry] Brito told me. “But I think a large portion of the ecosystem was completely cynical. That’s not helpful.”

Wall Street Journal - Courts Put Privacy Over Transparency in FTX, Other Crypto Bankruptcies

“A list of exchange users amounts to a list of people who might make for good robbery targets,” said Neeraj Agrawal

Politico - The dizzying legal saga around the U.S. Treasury’s decision to sanction the cryptocurrency mixer Tornado Cash is continuing to heat up

CoinDesk - U.S. SEC Out-of-Bounds in Dragging DeFi Into Proposed Exchange Rule, Industry Says

If you like our policy updates please consider forwarding this to a colleague.

You can support Coin Center’s mission at coincenter.org/donate.

Both Committees have been gracious enough to constructively consider our input and we look forward to working with them during this process. The proposed legislation creates a federal pathway for fundraising around the issuance of a token, as well as registration for centralized cryptocurrency exchanges. This legislation further delineates the roles for the SEC and CFTC when it comes to regulating these activities.

One hotly discussed topic surrounding this legislation is whether it should address "DeFi." Many people have different understandings of what this term means, and indeed we have already seen centralized actors purporting to be decentralized finance go bankrupt and defraud customers whose assets they were in custody of. 

This week we published a further explanation of what it means to conduct decentralized exchange, and articulated our top priority to ensure that any legislation regulating cryptocurrency markets respect the free speech rights of developers to publish code. 

In the coming weeks we will be guarding against inclusion of any provision that would create a government registration or licensure requirement before exercising this fundamental right.

Read more: How Congress should (and should not) approach DeFi

Speaking of regulating DeFi, today Coin Center filed a second comment letter with the Securities and Exchange Commission in its ongoing rulemaking regarding the definition of ‘exchange’ and Alternative Trading Systems. 

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Our first comment letter, in April of Last year, explained that the proposed redefinition of “exchange” violates the First Amendment by requiring a license to speak–even of open source developers. Our new comment is in response to the Commission having reopened the comment period after it made available “supplemental information” to address the fact that its initial 200-page proposal never once mentioned crypto or DeFi or anything like it even though they were clearly implicated by the change. 

In the new comment we explain that the proposed rule would not withstand constitutional scrutiny because it is insufficiently clear in its potential applicability as to render it unconstitutional under the Due Process Clause of the Fifth Amendment. Comments from the public are due on Tuesday and we encourage all interested folks to file.

Last week we filed our motion for summary judgment in the case we and co-plaintiffs have brought against OFAC and the Treasury Department for its illegal sanctioning of Tornado Cash smart contracts. 

What this tells the court is that since there are no facts in dispute between the parties at trial, it can go ahead and make a judgment based on the law, and we lay out our arguments for why the government clearly violated the law in this case.

We’re extremely proud of our memo in support of the motion, which we think clearly shows that contrary to what the government may claim, the Tornado Cash smart contract addresses in question are immutable executable code (i.e. not persons), and thus not subject to OFAC’s authority. 

We encourage you to read it. It’s written in plain English, so you can understand it even if you’re not a lawyer. We hope it gives you a sense of the work our litigation team (including Cam, Jeff, Abe, Peter, and Michael) has been doing to defend our rights to publish and use crypto code.

The most alarming move from Congress was not actually about cryptocurrency, but rather about TikTok. The RESTRICT Act, which is meant to ban Americans from using the service, but is written so broadly that if passed would amount to a new and less accountable sanctions regime. Coin Center pointed this out. 

Read more: The RESTRICT Act creates blanket authority, with few checks, to ban just about anything linked to a ‘foreign adversary’

Peter Van Valkenburgh joined journalist Taylor Lorenz on the Reason podcast to discuss the matter: 

Recent reports indicate that Senators Warren and Marshall have delayed introducing the Digital Asset Anti-Money Laundering Act in an attempt to gather more support for the bill. The bill would force anyone who helps maintain public blockchain infrastructure, either through software development or validating transactions on the network, to register with the federal government.

Coin Center wrote about how this bill is a direct attack on the personal freedom and privacy of cryptocurrency users and developers, and has been working to ensure members of Congress oppose the bill as drafted.

Read more: The Digital Asset Anti-Money Laundering Act is an opportunistic, unconstitutional assault on cryptocurrency self custody, developers, and node operators

The Treasury department published a DeFi risk assessment that raised concerns across the cryptocurrency industry. The report misunderstands self custody, smart contracts, and other key elements relevant to AML policy.

Read Coin Center’s analysis: Treasury’s new DeFi risk assessment relies on ill-fitting frameworks and makes potentially unconstitutional recommendations 

Coin Center also made some news of its own by hiring its first staff in years. We have been a team of five since the start. Now we are a team of six. 

(Click through for the full thread)

Landon Zinda joins us as Policy Counsel. He comes to us from the Senate Banking Committee, handling cryptocurrency policy issues for Senator Toomey, and previously served as Legislative Director for Blockchain Caucus Co-Chair (and now House Majority Whip) Rep. Tom Emmer. During his time on Capitol Hill, Landon earned the respect of his peers and worked to draft several pieces of legislation that are Coin Center priorities, including the Virtual Currency Tax Fairness Act, Securities Clarity Act, and the Blockchain Regulatory Certainty Act.

The 2023 Coin Center Annual Dinner was a huge success. Thank you to all who joined us. You can see pictures from the event here. 

We are already planning next year’s dinner so stay tuned for more information. 

Finally, Peter was on the PGP (Pretty Good Policy) podcast discussing electronic cash and the Constitution. 

You can listen to the whole thing here.

In a recent article in Lawfare, Henry Farrell and Bruce Schneier defend sanctions imposed on Tornado Cash, a privacy tool on the Ethereum network. They argue that these sanctions are not restraints on free speech because Tornado Cash is not merely published code, but an autonomous actor designed to undermine the law, and they question whether such a thing is subject to First Amendment protection. Unfortunately the article is riddled with incorrect assumptions and mischaracterizations of the technology, the law, and the views of the sanctions’ critics. 

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Farrell and Schneier's main argument is that Tornado Cash is analogous to a golem, an animated clay creature from Jewish mythology that wreaks havoc autonomously. They characterize the Office of Foreign Asset Control’s (OFAC) recent sanctions against Tornado Cash as reasonable regulation. And they characterize opponents of those sanctions as zealous anarchists. 

None of these characterizations is fair or accurate. 

Tornado Cash is merely a software-based privacy tool and it only ever does what its users want it to do. OFAC’s sanctions are a full and unequivocal ban on Americans’ freedom to use that tool, even for legitimate privacy reasons. Opponents of the sanctions are standing up for the rule of law and against the arbitrary and overbroad misapplication of our nation’s sanctions regime.

Mischaracterization One: What is Tornado Cash?

Tornado Cash is a free software tool that’s available at 20 Ethereum addresses. The nature of that software and of the Ethereum blockchain means that the Tornado Cash tool is as unchangeable and uncensorable as the Ethereum blockchain itself. Indeed, it’s helpful to think of Tornado Cash as a mere extension of the Ethereum protocol: Ethereum allows you to send tokens from address to address, and Tornado Cash allows you to do that with privacy. Neither Ethereum nor Tornado Cash requires you to put your trust in anyone while transacting, and neither allows any third party to control your assets while you transact. 

“Tool” or “software” are the most straightforward ways to characterize Tornado Cash. Nonetheless, Farrell and Schneier variously refer to Tornado Cash as a “platform,” “entity,” “DAO,” and “golem,” never settling on any one of these often contradictory and confusing characterizations. 

The golem metaphor certainly offers up shock value, but little else. If Tornado Cash was truly like a golem, then we’d be in a grave situation akin to the invention of strong artificial intelligence or the discovery of supernatural forces. Tornado Cash is much more mundane than all that. It’s just a tool. Unlike the fairy-tale golem – an animated and malevolent force – Tornado Cash is an inert tool, like a screwdriver or an envelope. And like any tool, its utility is dependent upon its use by individuals. 

When, for example, a person wishes to donate money to organizations supporting the defense of Ukraine, she can use the Tornado Cash tool to send cryptocurrency without worry that Russian hackers will identify and target her. Throughout the process, the donor has control over the tool and the tool only does what she wants it to do. It’s true that Russian officials may not like what the user is doing with that tool, and may want control over the tool in order to stop her from donating to their enemy, but this is not at all equivalent to the tool being “self-executing” or a clay-statue come to life “doing terrible things.” 

At the start of their golem discussion, Farrell and Schneier introduce another term, “DAO,” that they previously had not used to describe Tornado Cash. DAO, or decentralized autonomous organization, is a term that has come to mean associations that are mediated through blockchain transactions between human participants rather than through legally binding contracts. Farrell and Schneier take pains to pillory that term, selectively quoting Gavin Wood’s 2014 presentation about “allegality” (Wood’s word for technological indifference to law). While Wood did, indeed, claim that DAOs would be services that “cannot be shut down. Not by a court, not by a police force, not by a nation state.” His point, however, was focused simply on the widespread distribution, transparency, and availability of free software tools, not some malevolent or autonomous “will” that’s embedded within them. Later in the same presentation Wood analogizes the rise of these tools to VCRs and recreational marijuana. The widespread popularity of those things is what makes them difficult to stop; you have to apprehend every individual illegally recording a film or smoking a joint.  

Wood’s talk is controversial, but doesn’t deserve the one-sided characterization offered by Farrell and Schneier. Towards the end, Wood even stresses the need for mutual respect between governments and persons experimenting with new technologies, the need for education, and evidence-based policy decisions rather than knee-jerk responses driven by prejudice, hollow moralization, and—presciently—the demagogic use of myths (like golems). 

Either way, this ominous and politically charged invocation of Wood is an irrelevant red herring in any discussion of Tornado Cash. The Tornado Cash tool itself is not a DAO. There’s no group of DAO token-holders or DAO members who control the operation of the smart contracts. There is a Tornado Cash DAO that performs non-essential activities to support continued development of Tornado Cash privacy software, however that DAO does not and cannot control the operation of Tornado Cash. Remarkably, the Ethereum address of that DAO is not one of the sanctioned addresses announced by OFAC, and none of the designations contested in pending lawsuits challenging the sanction have anything to do with that DAO. While Farrell and Schneier’s discussion of DAOs may be timely in the context of other pending legal or regulatory action (e.g., the Ooki DAO enforcement action from the CFTC), it is again irrelevant to understanding how Tornado Cash functions or why it’s been sanctioned.

At one point, Farrell and Schneier characterize Tornado Cash as “self-executing code that exists only as software.” This is closer to the mark but still confusing. The Tornado Cash software is, indeed, just software. It is not, however, self-executing. Someone who wants to use the tool can do so, and the tool, like any good nail gun or ice pick, will function as designed. That functionality, however, is hardly “self-executing.” Throughout the entire process, control remains with the tool’s user – not with the tool itself. If I dig a hole in my backyard and bury $500 dollars in it, my shovel is not self-executing; moreover, I’m the only person who’s ever likely to get that $500 back. I might have broken a law by hiding money this way, but I am the one to blame. There's nothing mystical about my shovel that justifies a debate over whether Americans should be able to use shovels or not. Tornado Cash is the same: it’s like a shovel, not a monster made of clay.   

Mischaracterization Two: What did OFAC do? 

A casual reader might come away from Farrell’s and Schneier’s article with the notion that OFAC is simply regulating Tornado Cash to make sure that North Koreans or other bad actors can’t have the benefit of privacy while using Ethereum. They describe OFAC as merely “regulating activities that it deems endangers [sic] national security,” and underscore the need to weigh “legitimate reasons for seeking anonymity” against “other harms to society.” OFAC’s sanctions, however, do no such thing. The sanctions don’t regulate Tornado Cash, they make it illegal for Americans to use it—period.

“Regulation” typically refers to rules promulgated after a public process and intended specifically to modify the behavior of persons. Tornado Cash is not a person. It does not have “behavior” any more than a hammer has the tendency to push a nail when swung by a skilled operator. In this way, the concept of “regulating Tornado Cash” is rather nonsensical.

What OFAC is actually doing is banning every and any usage of the Tornado Cash tool by Americans. OFAC is not weighing “legitimate reasons for seeking anonymity” against “other harms to society,” it is making it illegal to do that weighing in the first place. 

Many Americans, including Coin Center, simply want to use Tornado Cash as a tool to maintain their privacy as they use Ethereum for entirely legal and legitimate purposes. OFAC’s sanctions make it a crime for us to do so even though our usage of the tool does not involve any criminal money or any payments to criminals, sanctioned persons, or enemy governments. 

Mischaracterization Three: What are the opponents to these sanctions arguing?

Farrell and Schneier lump two counterarguments to OFAC’s Tornado Cash sanctions together: First, that Tornado Cash sanctions are “a restraint of free speech” because “software programs are a form of speech” and, second, that “the Treasury Department has the authority to sanction only humans and not software.” The article only ever discusses the merits of the first claim and doesn’t explain or critique the second whatsoever. 

Farrell and Schneier don’t see merit in the code-as-speech counterargument because, as they point out, OFAC is not banning publication. You have a right to publish code; you don’t always have a right to use that code to do real things in the world. Using code (action) is not the same as publishing code (speech). Certain forms of expressive conduct, like flag burning or nude dancing can be, and often is, regulated, despite some First Amendment protections. On all of this we agree with the authors, but the entire discussion is, again, a red herring. 

OFAC is not merely regulating Americans’ usage of Tornado Cash, they are banning Americans from using it altogether. Farrell and Schneier offer no opinion as to whether that’s a legitimate use of sanctions powers. We believe that it’s illegitimate. The sanctioning powers delegated by Congress to the president via the International Emergency Economic Powers Act (IEEPA) are narrowly specified and limited to banning transactions with a foreign person or majority foreign entity. Congress never intended for the president to wield his IEEPA powers to ban Americans from using this or that technology irrespective of whether they are transacting with a sanctioned foreign person, and the text of the law certainly makes no accommodation for the kind of capricious and arbitrary enforcement that interpretation would require. Farrell and Schneier do not discuss or critique these arguments in any detail. 

Nor is statutory interpretation the only grounds on which we question the validity of the Tornado Cash sanctions. Unequivocal bans on expressive conduct are often unconstitutional even though expressive conduct gets less protection than pure speech. This is especially true if a ban unduly effects, or “chills,” free expression through overbroad application. The breadth here is all-encompassing: OFAC’s Tornado Cash sanctions do not merely forbid Americans from paying criminals or enemy states; the sanctions forbid Americans from using the tool to privately receive their paycheck, to privately pay for a book, to privately do essentially anything on the Ethereum blockchain. Significantly, the sanctions also forbid Americans from using the tool to anonymously contribute to legitimate political and social causes and organizations. The sanctions not only burden a substantial amount of protected expression, they also impinge on the right of anonymous association (a hard-won protection originating in the civil rights movement when racist, pro-segregation governments attempted to force civil rights organizations to disclose lists of their members).          

The authors also uncharitably characterize opponents of these sanctions and cryptocurrency advocates generally as “zealots” and anarchists. Like “golem,” the label “zealot” comes from Jewish history and mythology. Zealots were members “of an ancient Jewish sect that aimed at a world Jewish theocracy and resisted the Romans until AD 70.” In modern times the term has come to mean “a person who is fanatical and uncompromising in pursuit of their religious, political, or other ideals.” And what are the political ideals of these cryptocurrency zealots? According to Farrell and Schneier, nothing short of the full destruction of the state; it is “a radical effort to undermine the very idea of government authority.” This is an unfair and damaging portrait.

Many cryptocurrency advocates and users, including Coin Center and our co-plaintiffs, believe earnestly in legitimate government authority. In particular, we believe in the rule of law. We believe OFAC’s unreasonable interpretation of its own statutory authority is a threat to that rule of law and an example of extra-legal power wielded arbitrarily against law-abiding Americans who are reasonably seeking to protect their privacy and freedom online. We are not objecting to sanctions, and certainly do not think that North Korean or other cybercriminals should escape justice. We do, however, think it’s wrong to use sanction powers to target Americans who are merely protecting their own privacy and freedom of association. As Justice Douglas said, “I am not yet ready to agree that America is so possessed with evil that we must level all constitutional barriers to give our civil authorities the tools to catch criminals.”   

What do the authors actually want? 

Much of Farrell’s and Schneier’s article is confusing, but the most difficult passage to parse comes when they attempt to temper and limit their support for the ban. “We certainly don’t think that the U.S. government should ban DAOs or code running on Ethereum or other blockchains, or demand any universal right of access to their workings,” they say. 

As we’ve discussed, the Tornado Cash privacy tool isn’t a DAO; it’s just code at 20 addresses that anyone can use to send money privately. The sanctions are not calibrated “regulation” of bad actors, they are a full ban on every American’s use of the tool for any reason. 

If that’s not exactly what Farrell and Schneier say they don’t want, a “ban” on “code running on Ethereum,” then what is it? If they don’t want OFAC to ban code running on Ethereum, what do they want? Their article seems to conjure something, but it's unclear what’s written on this golem’s head.  

Join the discussion of this piece on Twitter:

https://twitter.com/valkenburgh/status/1585298343768756225

 You can read more about our suit and the full complaint here: Coin Center is suing OFAC over its Tornado Cash sanction. 

Previously, we have sued the Treasury department over its unconstitutional surveillance requirements for transactions directly between two parties. That case is in process and we will share updates when we can. 

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Recent news from the Securities and Exchange Commission has reopened the discussion of when and how NFTs can be securities. Research Director Peter Van Valkenburgh joined Laura Shin to dive into these issues. 

Different news from the SEC has reopened the discussion of staking and securities laws. Peter joined a twitter space hosted by our friends at the Proof of Stake Alliance to break down the issue.

Listen to the recording here:

Read more: Does the Merge change how Ethereum is regulated? (No.)

Peter also gave a lecture on privacy and surveillance law for U.C. Berkeley’s Decentralized Finance MOOC. The video is two hours long and goes into detail on hot button issues particular to DeFi. 

Watch: Peter Van Valkenburgh, Current Topics in Crypto Regulation

We participated in POLITICO’s Writing the Rules of Crypto event in D.C. alongside Rep. Patrick McHenry, ranking member of the House Financial Services Committee. 

Coin Center in the Media 

Wall Street Journal - Crypto Advocacy Group Sues U.S. Treasury Over Tornado Cash Sanctions

Washington Post - Industry group sues government over sanctions on Tornado Cash mixer

Politico - A second Tornado Cash Lawsuit

Axios - ​​Coin Center suit alleges Tornado Cash sanction exceeded statute

Bloomberg - Crypto Group Sues Janet Yellen, US Treasury Over Tornado Cash Sanctions

The Block - Coin Center sues Treasury over Tornado Cash sanctions

CoinDesk - Crypto Think Tank Coin Center Sues US Treasury Over Tornado Cash Sanctions

Decrypt - Coin Center Sues Treasury Over Tornado Cash Ban

As always, if you wish to support Coin Center’s policy advocacy mission please consider making a donation: coincenter.org/donate

To begin, Ethereum’s successful switch to proof-of-stake has put the less well known to policymakers consensus mechanism in the spotlight. This has resurfaced several discussions and much concern about how regulators might change their stance toward Ethereum. 

We published a quick analysis of the two biggest issue areas we’ve seen discussed: securities law and OFAC compliance. 

Read more: ​​Does the Merge change how Ethereum is regulated? (No.)

The short version is we don’t think miners and stakers should be treated any differently by the SEC, and we don’t think OFAC has the authority to order block producers (be they miners or stakers) to censor packets of information. 

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Chairman Gary Gensler added fuel to the SEC discussion when he suggested to reporters, following his Senate testimony, that a staking model might trigger a prong of the Howey Test. 

It’s not exactly clear if he was referring to custodial staking-as-a-service or native on-chain staking. There is a world of difference between those two forms of staking. We have previously written a thorough explanation of the different uses of the word “staking” to help policymakers make informed decisions in this area. 

Read more: How policymakers should think about “staking”

By the way, during that hearing Senator Toomey had a pointed exchange with the SEC Chairman on the nature of decentralization that is worth watching. 

The Treasury Department’s Office of Foreign Asset Control (OFAC) published guidance interpreting its sanctions ofTornado Cash smart contracts. The guidance was offered in the form of answers to four “frequently asked questions.” 

While they make some things clearer, they don’t cure the fundamental fact that OFAC does not have the authority to sanction immutable smart contracts or Americans who use them. Here’s a quick breakdown of what OFAC said.

1. If you have funds trapped at one of the sanctioned addresses, OFAC says that you can request permission from them to withdraw your funds by petitioning for a “specific license.” Of course, to get such a license you have to give up your privacy, which is the reason you were using Tornado Cash completely legally in the first place. They say: “U.S. persons should be prepared to provide, at a minimum, all relevant information regarding these transactions with Tornado Cash, including the wallet addresses for the remitter and beneficiary, transaction hashes, the date and time of the transaction(s), as well as the amount(s) of virtual currency.”

2. If you were the victim of a “dusting” attack in which you received unsolicited funds from one of the sanctioned addresses through no action on your part, OFAC makes clear that you are in technical violation of U.S. sanctions law. Not to worry, though. As long as you fill out paperwork reporting the transaction (and seemingly annual reports going forward as long as the sanctions are in place), OFAC promises that it will not make your prosecution a priority. This just highlights how the application of sanctions to immutable smart contracts makes no sense. The result is that Americans who are the victims of an attack, who took no action to interact with sanctioned addresses, and who may not even know they are victims of “dusting,” are now being told that they potentially have paperwork obligations for the rest of their lives and can always be enforced against for violations of sanctions law.

3. OFAC makes clear that by adding the Tornado Cash smart contract addresses to the SDN List they really mean that Americans are prohibited from ever executing that code.

4. OFAC makes clear that the addition of the Tornado Cash smart contract addresses to the SDN List does not mean that Americans are prohibited from publishing the smart contract code at those addresses. This was never really a seriously open question because such a prohibition would be an obvious and flagrant violation of the First Amendment. That said, it’s good that they have made it clear in writing. After the sanctions were announced, GitHub took down the Tornado Cash code even though the sanctions did not require them to do so, as this clarification makes clear. We would hope that GitHub would now reconsider its decision.

Coin Center will have more to say soon as we continue to work on a potential legal challenge, but nothing in this new guidance affects the claims that can be made in court.

Next week, Coin Center Director of Research Peter Van Valkenburgh will be participating in POLITICO’s Writing the Rules of Crypto event. Use that link to register and watch the event live. Tuesday, September 20th, at 4 PM Eastern. 

Coin Center in the Media

Washington Post: Crypto exchange targets Treasury sanctions in national security clash

Politico Pro: Treasury issues guidance on Tornado sanctions amid crypto industry uproar

Decrypt: Gensler Says Proof-of-Stake Assets Could Be Securities: Report

As always, if you wish to support Coin Center’s policy advocacy mission please consider making a donation: coincenter.org/donate

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We used that understanding as a basis to map Tornado Cash’s function to OFAC’s statutory authority. It looks to us that the Treasury Department is indeed on weak legal footing for this particular sanction. Yesterday Peter Van Valkenburgh sent an a la carte newsletter laying out the resulting legal analysis. 

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Here’s an (very) abridged version: 

1. The addresses themselves, and the software that they point to on the Ethereum blockchain, are not “property in which some foreign country or national has an interest.” 

2. To the extent anyone has property in those addresses, it is because they’ve sought the privacy provided by those software tools. That property is their own and no one else has any control or ownership rights to that property. 

3. When a person uses the Tornado Cash contracts to protect their privacy, they arguably are not even engaged in the kinds of activities that IEEPA empowers the President to block.

4. To the extent that some Tornado Cash users are sanctioned persons, and they have some property at those smart contract addresses, then that property and that property alone is legitimately the target of sanctions. 

Read more of the summary: How does Tornado Cash actually work?

Full Tornado Cash explainer: How does Tornado Cash work?

On Capitol Hill, we worked with longtime cryptocurrency champion Rep. Tom Emmer to send a letter to OFAC echoing our concerns with the Treasury Department’s reasoning. 

Our friends at the Electronic Frontier Foundation have also joined the fray. Cryptographer Matt Green has re-uploaded the previously censored Tornado Cash repo to GitHub. Should the government attempt to censor this publication of that code, EFF has agreed to represent Matt on free speech grounds. This is complementary to Coin Center’s focus on getting the sanctioned smart contracts off the SDN list.

Mike Mosier of Espresso Systems, formerly acting director of FinCEN, reminded us how his former employer viewed autonomous code vs. an entity that would be subject to regulation. 

If anyone knows it would be him. For more details, see our analysis of FinCEN’s 2019 guidance. 

Earlier in the week, Peter appeared on the Epicenter podcast for a lengthy discussion of the Tornado Cash sanctions.

And he also appeared on MoneroTalk to discuss implications for other privacy focused projects. 

As always, if you wish to support Coin Center’s policy advocacy mission please consider making a donation: coincenter.org/donate

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None of the core contracts that provide privacy tools to users can be upgraded, changed, or altered. The privacy that users get from these contracts is guaranteed with math and software that is as immutable as the Ethereum blockchain itself.  

To the extent that any of the OFAC-sanctioned addresses retain a human operator role, they are either mere donation addresses to support software development, ancillary services that never control user tokens, or defunct/never used addresses. Read the explainer, and check out the detailed appendix describing each address if you want more. 

Additionally, our explainer describes exactly how Tornado Cash provides privacy for its users. The deposit and withdrawal contracts do not mix or commingle user tokens. Instead, each user puts in specific tokens from an address she controls and receives from the smart contract a specific note which, using zero knowledge proofs, allows that user to withdraw their specific tokens to another address without leaving a public record on-chain that could link the user’s sending and receiving address. While colloquially referred to as a “mixer,” the contract addresses are nothing of the sort. The better analogy is to a room full of safe deposit boxes. From the explainer: 

Think of it like a bank’s safe deposit box room. Anyone can go and store valuables in a locked box in that room, and, assuming the locks are good, only the person with the key can ever get those valuables back. Security aside, however, this may or may not be privacy enhancing. If only one person is ever seen going into and out of the room, then we know any valuables in that room are theirs. If, on the other hand, many people frequently go into and out of the room, then we have no way of knowing who controls which valuables in which boxes. By guaranteeing the property that users can only withdraw tokens they originally deposited, many users can simultaneously use these pools with the assurance that no-one else will receive their tokens.   

This setup, rather than a mixing of funds, even allows (or allowed) for compliance with AML/CFT laws, and developers created software tools so that users wishing or obligated to comply with laws in their specific jurisdiction could obtain a proof that their funds originated from an identified and non-sanctioned source:

To this end, the developers of Tornado Cash created the Tornado Cash Compliance Tool. Users supply the tool with the original “deposit note” generated during the pool deposit process to create a PDF report that provides proof of the original source of the tokens. Although the public link between a user’s deposit and withdrawal addresses was severed by the Tornado Cash pool contracts, the Compliance Tool allows users to selectively “undo” this severance to provide traceability to third parties.

This research is critical in laying the groundwork for a legal challenge that OFAC’s designation of Tornado Cash’s immutable contracts is inappropriate under the statutory authority granted by Congress in the International Emergency Economic Powers Act (IEEPA). As we explained last week, IEEPA empowers OFAC to sanction “property in which some foreign country or national has an interest” (50 U.S.C. §1702). Does the Tornado Cash listing fit within these powers, or is it statutory overreach? We believe it is clearly overreach.

First, the addresses themselves, and the software that they point to on the Ethereum blockchain, are not “property in which some foreign country or national has an interest.” They are widely distributed tools, ideas fixed in a shared medium of expression (the Ethereum blockchain), copies of which exist on the personal computers of thousands of persons around the world. Additionally, the small minority of contracts listed by OFAC that retain some level of human updateability are not actually used to control, mix, or move user funds. They are either ancillary services, donation addresses for software development efforts, or defunct and now unused contracts on the Ethereum blockchain. 

Second, to the extent anyone has property in those addresses, it is because they’ve sought the privacy provided by those software tools. That property is their own and no one else has any meaningful control or ownership rights to that property. Nor is that property mixing or commingling with anyone else’s property. That property is, in effect, in a public room where very strong (indeed unbreakable) safe deposit boxes are available for anyone’s usage. Unless these sanctions are merely narrowly targeted at some specific users of those contracts, the other funds that Americans and other law-abiding persons have in those contracts are not properly the target of sanctions. Those funds, again, are not “property in which some foreign country or national has an interest.” 

Third, when a person uses the Tornado Cash contracts to protect their privacy, they arguably are not even engaged in the kinds of activities that IEEPA empowers the President to block. Those activities listed in the statute are: “acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest[.]” (Emphasis added.) While interactions with a smart contract are colloquially referred to as Ethereum “transactions,” and while fees are indeed paid to miners to include those “transactions” in blocks, the individual choice to move one’s tokens from a personal address to a Tornado Cash address is no more a “transaction” with another person than moving one’s valuables from a drawer in one’s home to a safe in one’s home. At no point does any third party have any control or power during the movement; only the person to whom the valuables belong retains possession and control. That activity is certainly not similar to the commonly understood meanings of the various activities in IEEPA that the President is empowered to block.   

Finally, to the extent that some Tornado Cash users are sanctioned persons, and they have some property at those smart contract addresses, then that property and that property alone is legitimately the target of sanctions. In that case the address of the smart contract itself is not an appropriate alias for that entity or property because, like the name John Smith, it wrongly subjects many more persons to sanctions scrutiny than sanctions laws intend or allow. This would be a problem if there was no way to discriminate between funds in the contract, but, as described above, there is already a compliance tool that allows law-abiding persons to prove that the source of their funds is not a sanctioned person. Given all that, the appropriate addresses to sanction are the addresses from which sanctioned persons are depositing to the Tornado Cash contracts and not the Tornado Cash contracts themselves.

We will continue to keep you updated as we work toward a legal challenge of the OFAC designation. If you are someone who has been injured by the designation, especially if you have funds stuck in a sanctioned smart contract or have been the unwilling recipient of funds from a sanctioned smart contract after the designation, we would like to talk to you. Please get in touch.

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Read last week’s newsletter to catch up on what we’ve already done.

This week we published a much more in-depth legal analysis of OFAC’s action. 

Read more: Analysis: What is and what is not a sanctionable entity in the Tornado Cash case

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We distinguish a potentially sanctionable Tornado Cash entity and the autonomous smart contract Tornado Cash itself. We argue that by treating the autonomous code as a “person” OFAC has exceeded its statutory authority. 

In the present case, the sanction is accomplishing something very different; it’s saying Americans can’t even make use of intellectual property in which the authors have no economic interest. For one thing, the software in question has been released under open source licenses so no American has in the past, or will in the future, pay any license to any author (irrespective of whether those authors are sanctioned). Additionally, the copies of the software already reside on the home computers of anyone who connects to the Ethereum network. The appropriate metaphor for this sanction, therefore, is as if an Iranian author has been sanctioned and, therefore, Americans who already own copies of his book must refrain from reading that book. Similarly, we believe OFAC’s designation is also unlawful because it exceeds its authority under the Executive Order given that the associated addresses are not “persons” as defined in that order, for the reasons we explain above.

There is a complex argument made about de facto licensing regimes and unchecked administrative authority. Joe Weisenthal at Bloomberg boiled it down:

Jerry Brito and Peter Van Valkenburgh dusted off the Coin Center podcast Tangents to discuss the arguments we make. Links to listen are here. And here’s the video version: 

And Jerry appeared on ReasonTV for an 11 minute summary of the civil liberties issues at play. 

Finally, we participated in a Twitter space hosted by our friends at Espresso Systems to take community questions. Listen to the recording here:

Our analysis ends with a summary of our next steps: 

First, we will seek to engage OFAC, share our views, and hopefully hear theirs. We have also had inquiries from members of Congress about the situation and we will continue to brief interested parties there.

Second, there are innocent Americans who have funds trapped at listed Tornado Cash addresses. We will do our best to help them apply for a license to withdraw those funds. In addition, the DeFi Education Fund has announced that it will be petitioning OFAC to issue a “general license” that would cover all affected persons without each having to file individually and we will support that effort.

Finally, we will begin exploring with counsel a court challenge to this action. Stay tuned.

We are grateful for the outpouring of support from the community and the wide sharing of our arguments. We are still in the exploratory phase of a legal challenge. In particular if you are an American who used Tornado Cash, we want to hear from you. 

If you want to support our work, please consider donating: coincenter.org/donate

The cryptocurrency world was rocked this week as the U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) announced it had added “Tornado Cash” and several related Ethereum addresses to the Specially Designated Nationals And Blocked Persons list. In short, they attempted to sanction the Tornado Cash smart contract itself in addition to persons connected with Tornado Cash. 

This is a first for OFAC, which typically sanctions people or companies. We have never seen autonomous decentralized code added to the list before. This is a hair-raising precedent that has already been followed by the deletion of open source code from hosting providers and the arrest of at least one developer. 

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Soon after the news came out we published a preliminary analysis of the situation: U.S. Treasury sanction of privacy tools places sweeping restrictions on all Americans. 

How is adding Tornado.cash to the SDN list different from past OFAC actions? A smart contract is a robot, not a person. It is software that resides on the Ethereum blockchain. If a contract is credibly decentralized then the original authors of that contract could be hit by a bus and the service would continue to work. As such, today’s action does not seem so much a sanction against a person or entity with agency. It appears, instead, to be the sanctioning of a tool that is neutral in character and that can be put to good or bad uses like any other technology. It is not any specific bad actor who is being sanctioned, but instead it is all Americans who may wish to use this automated tool in order to protect their own privacy while transacting online who are having their liberty curtailed without the benefit of any due process.

Our director of research happened to be speaking at a conference later that day. He used the opportunity to give another overview of the situation and deeper breakdown of the legal issues at play.

The full video is roughly 30 minutes and available here. Here’s a clip: 

We also appeared on Bankless and Laura Shin’s Unchained. 

Our views on the misguided nature of sanctioning decentralized applications and the many issues that raises made it into much of the media coverage of the issue:

• Politico: The tornado tearing through crypto

• New York Times: Treasury Dept. blacklists crypto platform used in money laundering

• The Washington Post: U.S. bars Americans from using crypto service Tornado Cash

• CNBC: Crypto mixing service Tornado Cash blacklisted by Treasury Department for alleged use in laundering

• The Verge: Alleged Tornado Cash developer arrested in Amsterdam

• Fortune: Crypto gets censored: Uncle Sam comes for source code, newsletters

Coin Center will continue to stand up for developers and users of privacy preserving technologies. Next week we will publish a deeper legal analysis of the action. Behind the scenes we are coordinating with community members who might want to challenge this action from the Treasury Department. 

If you want to support our work, please consider donating: coincenter.org/donate