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Behind the Tornado Cash Sanctions
Who enforces the sanctions on Tornado Cash and what power do they have? The Office of Foreign Assets Control(OFAC) is an American agency that gathers intelligence and enforces sanctions against states, organizations, and individuals that they consider to be threats to US National Security. Legal expert Peter Van Valkenburgh from Coin Centerjoined Epicenter to do an in-depth look at OFAC’s recent sanctioning of Tornado Cash. Here are five takeaways on how the OFAC works.
The OFAC decides who Americans can do business with.
If your name, country, or organization shows up on OFAC’s sanctions list, then American citizens and organizations are forbidden from buying/selling things from you, or even from engaging with you. OFAC gets its power from the International Emergencies Economic Powers Act, a 1977 law that lets the president regulate international commerce after declaring a national emergency caused by threats from outside the US. President Obama declared a national emergency in 2015 after North Korea hacks, allowing for sanctions to be used against North Korea at the time.
This recent sanction against Tornado Cash is strange because it is unclear which crypto becomes illegal. If someone sends you money from Tornado Cash, are you guilty? What if you’re 20 transactions removed from Tornado Cash? Pinning down how software is illegal is much more different from, say, buying a house in Iran or receiving money from North Korea - two other things that can be clearly defined as illegal.
The OFAC usually does an impact assessment of their sanctions to try and minimize damage to innocent people.
Innocent people often suffer because of sanctions. That’s why OFAC must consider the full extent of their sanctions by conducting a “collateral impact assessment.”
To do this, the OFAC usually sends agents to do some on-the-ground investigating to look at who the proposed sanctions will affect. OFAC must then try to minimize the damage done to innocent people. For example, let’s say it was sanctioning a bank in Honduras for laundering money and promoting the drug trade. OFAC would go to the bank, look at the innocent people using it, possibly give them special licenses so that they can withdraw their funds, and then activate the sanction.
According to Van Valkenburgh, it’s unclear that OFAC walked through these procedures before sanctioning Tornado Cash. This gives him, and Coin Center, evidence to build a strong procedural justice case against OFAC.
The OFAC’s goal is behavior modification, not punishment.
Sanctions are one tool that governments can use to try and force an organization, person, or nation to change their behavior. The goal of sanctions is not to punish the person, but rather, to stop the unwanted behavior - in theory, at least.
OFAC’s move against Tornado Cash looks more like punishment than an attempt to stop unwanted behavior. Smart contracts are not people who can be arrested and fined. They operate by themselves, on their own rules, to their own rhythm. Since you can’t change the behavior of smart contracts (ie. code), the effect of the sanctions is to simply punish those who use Tornado Cash. That’s something which OFAC cannot do.
The OFAC’s rulings can have a chilling effect on other institutions
The effect of OFAC is to turn an entity on their list into nuclear waste. Nobody wants to touch them, nobody wants to do business with them, nobody wants to do business with people who business with them. Crypto exchanges will likely block money coming from Tornado Cash addresses. Banks may not provide services to people associated with Tornado Cash, or perhaps even privacy-enabling entities at all. Lastly, software engineers will be wary of building open-source software that could be used by bad people and/or to do bad things.
Lest it be said, ostensibly bad things can do good in this world! Take lawyers for example. Even though criminals form a disproportionate part of their clientele, lawyers also preserve the rule of law and protect innocent people.
It’s not clear that OFAC is constitutional.
Using Tornado Cash now comes with very steep penalties of up to $1.5 million and 30 years in jail, so use it at your peril. However, the legality of OFAC’s indictment is questionable, and something that Coin Centre is challenging in court.
Anonymous donations have been protected by the first amendment to the US Constitution ever since 1958, in NAACP v. Alabama. In that case, Alabama demanded the list of donors to the NAACP (a civil rights organization for black people) to intimidate them. The Supreme Court found that citizens have a right, under the first amendment, to donate anonymously. That principle was protected as late as 2021, in Americans for Prosperity Foundation v. Bonta.
It’s hard to claim that everybody who touches Tornado Cash money does so knowing that the money has been laundered. Many people have Tornado Cash ether because it was sent to them! You cannot refuse to accept crypto sent to a wallet. In the United States, you must have a specific intent to launder money to be convicted for it, something which would be hard to argue if someone sent you Tornado Cash money.
America might just be one country among many, but many of the world’s biggest companies - Amazon, Facebook, Apple, etc, are all centered in America. The world depends on them for infrastructure, and the companies must follow OFAC sanctions. Thus, finding yourself on the OFAC list means that you’re at grave risk of losing your ability to transact with the rest of the world. Ensuring that the law is clear on what is and is not allowed in crypto is very important for the rest of the world, as well as for Americans.