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Staking doesn't change how ETH is regulated. And more on Tornado Cash.
Happy Merge to all who celebrate. This was a substantial week for crypto policy on several fronts.
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.
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.
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.
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.
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.”
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.
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.
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.
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