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In a new report, non-profit blockchain advocacy group Coin Center argues that the recently-sanctioned Tornado Cash smart contracts are not entities the Office of Foreign Asset Control can blacklist.
Peter Van Valkenburg, Coin Center’s director of research, claims in Coin Center’s latest report that OFAC’s move to sanction Tornado Cash and 45 related Ethereum addresses exceeds its authority, as granted by Congress in the International Emergency Economic Powers Act (IEEPA).
“IEEPA empowers OFAC to sanction ‘property in which some foreign country or national has an interest,’” Van Valkenburg wrote in the report published Thursday. “Does the Tornado Cash listing fit within these powers, or is it statutory overreach?
“We believe it is clearly overreach,” Valkenburg wrote.
Van Valkenburg and Coin Center argue that Tornado Cash is a software tool used by far more than just foreign countries and nationals. It is decentralized code, with scant few contracts OFAC singles out for sanction that actually can be updated by any human, and these are not used to control, mix or move user funds, Van Valkenburg added.
“None of the core contracts that provide privacy tools to users can be upgraded, changed, or altered,” Van Valkenburg said. “The privacy that users get from these contracts is guaranteed with math and software that is as immutable as the Ethereum blockchain itself.”
The IEEPA allows OFAC to block “transactions” involving property in which a foreign country or national has interest, Van Valkenburg said, but this terminology does not apply to Tornado Cash activities.
“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,” Van Valkenburg argues. “At no point does any third party have any control or power during the movement.”
The question of if or how OFAC can place sanctions against a code has been central to the discussion around Tornado Cash in recent weeks.
The Treasury Department argues that there are people who can alter Tornado Cash’s code, and it is their responsibility to ensure that illicit activity does not occur.
“Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks,” Brian Nelson, under secretary of the Treasury for terrorism and financial intelligence, said on August 8 when the sanctions were announced. “Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”
Since its launch in August 2019, Tornado Cash has received over $7.6 billion worth of ether, “a sizable portion of which have come from illicit or high-risk sources,” a recent Chainalysis report noted. Of this figure, about 18% of funds came from sanctioned entities, but, the report notes, almost all the funds were received before the entities were added to the sanctions list.
Less than 11% of funds received by the recently-sanctioned crypto mixing service Tornado Cash were stolen from other cryptocurrency exchanges and protocols, according to Chainalysis.
Coin Center, which has been a vocal opponent of OFAC’s decision to sanction Tornado Cash since the decision was announced earlier this month, has released a series of reports detailing how the mixing service works and what falls within OFAC’s powers.
The advocacy group said on August 15 that it would be exploring taking OFAC to court over the Tornado Cash matter.
The report comes shortly after Dutch financial crimes agency FIOD arrested a 29-year-old Tornado Cash developer in Amsterdam following OFAC’s sanctions announcement.
A Dutch judge ruled Wednesday that Alexey Pertsev may be held in jail without bail for up to 90 days while awaiting a public hearing.