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Exactly how Tornado Cash works and what that means for the sanction

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Exactly how Tornado Cash works and what that means for the sanction

Coin Center
Aug 26, 2022
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Yesterday Coin Center published a detailed explanation of exactly how Tornado Cash works. We worked with a number of solidity experts to ensure this is a just-the-facts description of exactly how the smart contracts work. 

Twitter avatar for @valkenburgh
Peter Van Valkenburgh @valkenburgh
1/ New detailed factual explanation of how Tornado Cash works. Huge thanks to @wadeAlexC and @LewellenMichael for this unbiased description of exactly how the contracts function. It confirms a level of decentralization that was surprising, even to me.
coincenter.orgHow does Tornado Cash work? - Coin CenterIn August 2022, the US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, adding 45 Ethereum addresses to the Specially Designated Nationals (SDN) List of sanctioned persons.
5:13 PM ∙ Aug 25, 2022
676Likes222Retweets

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. 

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. 

Twitter avatar for @RepTomEmmer
Tom Emmer @RepTomEmmer
I sent a letter to Treasury Secretary Yellen regarding the unprecedented sanctioning of Tornado Cash. The growing adoption of decentralized technology will certainly raise new challenges for OFAC. Nonetheless, technology is neutral and the expectation of privacy is normal.⬇️
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2:30 PM ∙ Aug 23, 2022
5,505Likes1,383Retweets

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.

Twitter avatar for @jerrybrito
Jerry Brito @jerrybrito
Glad to see @EFF will work with OFAC to clarify TC designation doesn’t mean it’s illegal to publish code. Coin Center is committed to establishing that OFAC exceeded its authority by sanctioning immutable smart contracts in the first place, even if we have to take OFAC to court
Twitter avatar for @matthew_d_green
Matthew Green @matthew_d_green
There are a lot of thorny issues around the OFAC/Treasury sanctioning of an open source project, and what it means for freedom of speech. To help figure those out, the EFF has agreed to represent me. https://t.co/S2Gn4r6dx1
9:41 PM ∙ Aug 22, 2022
104Likes14Retweets

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. 

Twitter avatar for @M_Mosier_
Michael Mosier @M_Mosier_
While a helpful explanation of mixer types, again, FinCEN did *not* say all mixers=MSBs. Only custodial, centralized ones. FinCEN said “anonymizing software” & “software providers” are *not* MSBs. OFAC diverged in treating smart contracts like “persons.” https://t.co/QHFFVmFCft
Twitter avatar for @chainalysis
Chainalysis @chainalysis
What is a #crypto mixer? How do they work? And are they compliant? Read on for a breakdown. 👇 https://t.co/abe2zauoTI
12:17 PM ∙ Aug 23, 2022
142Likes39Retweets

 

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.

Twitter avatar for @epicenterbtc
Epicenter Podcast – 🦅 Flying High 🐋 Diving Deep @epicenterbtc
🚀NEW EPISODE🚀 @coincenter carried out a full analysis of the @TornadoCash action by OFAC, and believe they have overstepped their legal authority. Coincenter is exploring a court challenge. @tw_tter chats to @valkenburgh for the latest on this case 👇 youtu.be/o9bIugc5M94
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12:55 PM ∙ Aug 24, 2022
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And he also appeared on MoneroTalk to discuss implications for other privacy focused projects. 

Twitter avatar for @MoneroTalk
MoneroTalk @MoneroTalk
A sneak peek 👀 of this weeks #MoneroTalk epi w/ @valkenburgh: Could Monero be sanctioned like Tornado Cash @coincenter Subscribe ➡️ → YT: youtube.com/c/monerotalk → iTunes: apple.co/34W7FVp → Spotify: spoti.fi/2t1y9b4 → ODY: bit.ly/3bMaFtE to get 🚨!
7:47 PM ∙ Aug 25, 2022
12Likes2Retweets

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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