Stablecoin issuer Tether has said it will not freeze assets linked to virtual mixer Tornado Cash unless “specifically instructed” by authorities.
“So far, OFAC [Office of Foreign Assets Control] has not indicated that a stablecoin issuer is expected to freeze secondary market addresses that are published on OFAC's SDN List or that are operated by persons and entities that have been sanctioned by OFAC,” Tether explained.
“Further, no U.S. law enforcement agency or regulator has made such a request despite our near-daily contact with U.S. law enforcement whose requests always provide precise details."
Tether added that based on their past dealings with law enforcement, freezing smart contract addresses or wallets too hastily might alert suspects of an ongoing investigation. Suspects might liquidate their funds or abandon them entirely, jeopardizing the investigation process.
Tether is not a U.S. company and does not specifically cater to American consumers. Therefore, the platform is not legally bound to the country’s regulations. However, the Hong Kong-based company still complies with some U.S. laws voluntarily.
Circle just frozen 75,000 USDC belonging to unsuspecting Tornado users, as well as 149 USDC donated to the project. pic.twitter.com/GBS41FtZvB
— banteg (@bantg) August 8, 2022
USDC issuer Circle froze assets linked to Tornado Cash on the smart contract level after a sanction by the OFAC went effective earlier this month. It is indefinitely freezing 75,000 USDC units linked to 44 addresses on OFAC’s SDN list.
“Circle is a regulated company and conforms to sanctions compliance requirements, including blocking the addresses associated with OFAC’s Tornado Cash designation,” a company spokesperson said.
On its blog, Tether called Circle’s action “premature”. The company said it stood with U.S.-based stablecoin issuers like Paxos and DAI, who have yet to freeze assets linked to the banned virtual mixer.
Per Etherscan, there are currently two banned addresses holding Tether stablecoin. The first address has $289,000.44, while the second holds $7,300. Since the ban was issued, Tether has recorded $5,000 worth of USDT transactions using the platform.
In the past, Tether faced several legal issues, including a $41 million penalty from the U.S. Commodity Futures Trading Commission for allegedly “making untrue or misleading statements” to its consumers.
Ban on Tornado Cash
The OFAC imposed the ban on Tornado Cash after the application was allegedly involved in laundering more than $7 billion in cryptocurrency since 2019. The case also involves the North Korean hacking group Lazarus, which stole $455 million.
My @GitHub account was just suspended 🤷
— Roman Semenov 🌪️ 🇺🇦 (@semenov_roman_) August 8, 2022
Is writing an open source code illegal now?
Miller Whitehouse-Levine of DeFi Education Fund explained that although companies needed to comply with the regulation, it was an “uncharted territory” as the government targeted open-source software.
“It has broad societal implications with respect to privacy and individual sovereignty, and whether we are okay with a foreign policy tool that can be applied unilaterally with zero public process to regulate U.S. persons’ behavior,” Whitehouse-Levine added.
Tornado Cash is an open-source software protocol that allows users to move virtual currencies from one place to another without disclosing their addresses. Its ban puts other similar protocols at risk of being the next target.
Several crypto firms are deciding whether to comply with the ban. Former U.S. Treasury official Ari Redboard said, “It’s up to businesses to take a risk-based approach. These companies are having to make decisions right now about compliance without a ton of guidance from regulators.”