READ THIS THREAD OR GO TO JAIL FOR 30 YEARS (sorry not kidding)
Tornado Cash added to US sanctions list - $437m of assets blocked.
What is OFAC, what are sanctions, and what does this mean for DeFi 👇
OFAC = Office of Foreign Assets Control
They administer and enforce sanctions against high profile individuals including major international terrorists, drug trafficking kingpins, and the financial/political elite of certain countries deemed hostile to American interests.
OFAC ensures that Americans cannot legally do business with Cuba, Iran, Iraq, North Korea, etc without special government approval.
OFAC’s maintains a List of Specially Designated Nationals and Blocked Persons (SDN List). You can search this list here
https://home.treasury.gov/policy-iss...readable-lists
On August 8, 2022 Tornado Cash and all the Ethereum wallet addresses associated with Tornado Cash and its smart contracts were added to OFAC’s SDN List.
https://home.treasury.gov/policy-iss...tions/20220808
All of Tornado Cash is blocked (can't be used by US persons), including their @Gitcoin
grants wallet. We scraped the wallet info from Etherscan - it is all of their addresses totaling $437m of stablecoins, ETH and WBTC.
It is illegal for *any* US ‘person’ to engage in trade, economic transactions, or “other dealings” with any person, company, or country on the SDN List. This now includes using Tornado Cash.
A US person is any citizen, resident, or company in the US.
Fines, civil, and criminal penalties can exceed Several Million Dollars. The maximum civil penalty for a ‘non-egregious case’ is $330,947.
Jail time for violations is a maximum of 30 years.
"Other dealings" is quite broad.
Government guidance states it could include “technical transactions such as downloading a software patch from a sanctioned entity”.
At this point it is probably illegal for US persons to visit the Tornado website.
Blocking immediately imposes an across-the-board prohibition against transfers or dealings of any kind with regard to the Tornado Cash property.
For WBTC, USDC, USDT we expect the issuers to take all technical steps to prevent anyone from moving or redeeming these assets.
Circle's USDC can be frozen at the smart contract level.
You can see the banned address list on Dune. Tornado isn't added *yet*.
Tether's USDT can also be blacklisted on the Ethereum smart contract level. You can see the banned address list on Dune.
WBTC is issued by BitGo. Its entities are in in South Dakota and New York. They must obey OFAC sanctions or face million dollar fines and jail time for their execs.
We therefore expect them to suspend redemptions of the tainted WBTC, rendering those tokens worthless.
Liquidity Providers will likely end up as bagholders for blocked WBTC (and stablecoin) assets if they do not pull liquidity from DEX *immediately*.
What does this mean for Ethereum miners and stakers who are US persons? There's no legal precedent we're aware of and we're not lawyers but it doesn't look good.
It seems possible that breach of OFAC sanctions would occur if a miner or validator produces (or validates) an Ethereum block which contains a transaction including one of the Ethereum addresses on the SDN list.
However, how it'll be enforced is unclear.
Speculation: Ethereum client software might be updated with an opt-in patch allowing miners/validators to ignore tainted mempool transactions to avoid breaching sanctions. Transaction censorship isn't popular but we could see this being done in house by large US miners / stakers.
It may be a risk for any US based fund invested in Ethereum proof of stake as voting for blocks containing the illegal transactions could be an illegal activity. We expect either technical countermeasures (voluntary censorship) or moving business outside US jurisdiction.
CEX will be expected to use their Chainanalysis software to block and report all customer transactions which are in breach of sanctions. This means anyone who withdraws from Tornado Cash and tries to withdraw via a US-linked CEX.
Non-US divisions of exchanges are separate legal entities, but could be seen as de facto ‘foreign branches’ of the US entity. Exchanges are strongly incentivized to ensure that their foreign-registered group companies also comply fully with OFAC sanctions.
To summarize
the US is willing to use its highest level of economic sanctions usually reserved for foreign powers and extremely dangerous people against a privacy product in crypto
if you are a US person, any interaction with Tornado Cash is probably illegal - including Gitcoin donations, working for the project, running or downloading its software, visiting its website, and depositing/withdrawing from smart contracts
all assets in Tornado as of August 8th are tainted. Tether, Circle, and BitGo will refuse to redeem these tokens. It is likely that the tokens will be withdrawn from TC anyway and dumped into liquidity pools. Liquidity Providers will be left holding the bag
there is a small risk of DEX pools for these tainted assets being blacklisted in their entirety out of an abundance of caution by the issuers (Circle, Tether, BitGo)
US persons running Ethereum mining or staking operations are possibly at legal risk - these businesses may self-censor transactions or move offshore
DeFi protocols beyond DEX which interact with Tornado’d funds may be at legal risk, as may be their (US based) staff
We will keep DeFi Education subscribers up to date with further analysis as new information emerges.
Monitor issuers / custodians / exchanges for official announcements.
Finally, if you are a US person with funds in Tornado: don't break the law, the money isn't worth it.
