Have US Crypto Sanctions Gone Too Far?

Photo: Bloomberg/Getty Images

There’s something alluring about North Korea for those on the edges of the western crypto world. Earlier this year, the hacker Virgil Griffith was awarded to five years for helping Kim Jong-Un’s government evade sanctions, while Tether, issuer of the third-largest cryptocurrency, has decided to pick a fight over its right to send money to related entities. Now, there’s a lawsuit against the US Treasury as well as Secretary Janet Yellen for the department’s sanctions, which are meant to target North Korea’s hacking army but are potentially so wide-ranging they verge on Orwellian for their potential to stifle free speech.

On Wednesday, David Hoffman, a crypto evangelist and podcaster, and Coin Center, a think tank for the industry, filed suit against the Treasury Department over sanctions it issued earlier this year against Tornado Cash, a tool that anonymizes cryptocurrency transactions. According to the Treasury’s Office of Foreign Assets Control, the department’s sanctioning arm, the blacklisting is a response to the Lazarus Group, the North Korean hacking army it claims has stolen and laundered some $500 million. The problem, though, is that Tornado Cash isn’t a company or a person — it’s code that lives on the ethereum blockchain, and there’s no way for anyone to control or destroy the protocol. Since Tornado Cash isn’t an entity, it can’t appeal. It’s up to people like Hoffman, who claims he may be forced to affirm every year that he’s not a criminal — not because he has used it or has some connection to North Korea, but because he once had someone send him money using Tornado Cash.

Tornado Cash is a kind of intermediary service, and the way it works is simple: Someone sends digital currency to a specific Tornado wallet, which then stores the money; afterwards, that central Tornado wallet can send money back to the sender, or to someone else, in smaller amounts and at different intervals, making it harder to trace. That’s basically it. Although US secretary of state Antony Blinken had previously accused Tornado Cash of being affiliated with North Korea, he later backtracked and claimed only that it had been used by the Lazarus Group to help it launder money.

Repercussions of the sanctions are already being felt around the world. In April, the developer Alex Pertsev, who worked on Tornado Cash, was arrested in the Netherlands. (His wife, Xenia, told me today that “he is fine but still in prison.”) Yet it’s unclear if the sanctions have had any effect on North Korea — and they appear to have only galvanized the most ideological corners of the crypto community . For Kim’s government, the appeal is obvious: Here is a form of international currency that’s extremely hackable and that had, up until last year, exploded in value during the pandemic, giving a financial lifeline to a country otherwise isolated from the rest of the world . For the crypto die-hards, the horrible living conditions and nuclear brinkmanship tend to be abstracted in favor of its status as a use case, as if it were some Harvard Business School problem made for fixing. If you believe in the central idealism of crypto — that it’s a financial way of getting around governments, central banks, and other oppressive entities — then there’s no more extreme environment for proving that your technology works than in this authoritarian regime.

OFAC — which is named as a defendant — is key to the US’s squeeze of Russia since the invasion of Ukraine, for instance, or in the isolation of states like Iran, Cuba, and Venezuela. But the Tornado Cash sanctions, according to an expert I spoke with, are a novel form of US blacklisting since they go after a specific piece of technology that isn’t necessarily nefarious. Roman Semenov, one of the code’s creators, says there is no way to stop Tornado Cash’s anonymizing features since it operates on ethereum, the world’s second-largest cryptocurrency, and anyone can use it.

The suit by Hoffman and Coin Center makes the case that the Treasury Department is overstepping its authority in penalizing a piece of technology because of its users. “Making it a crime for Americans to use Tornado Cash because the Lazarus Group used Tornado Cash to further its illicit activities is like making it a crime for Americans to use email because the Lazarus Group used email to further its illicit activities,” according to the follows. “Sometimes good tools are used by bad people.” Hoffman in particular claims that one facet of the sanctions, which penalizes anyone who receives money from the service, harms him as well because of a tactic known as “dusting,” whereby someone sent him a small amount of crypto through Tornado Cash. It’s unclear why he was sent the money — maybe it was from a privacy-minded person, maybe it was a troll — but Hoffman says he has to prove his innocence every year because of it. This would apply to celebrities like Jimmy Fallon and Shaquille O’Neal, who have also been sent money through the service, Hoffman says. “In other words, the Biden Administration has empowered any bad actor to easily subject a law-abiding American to potential civil and criminal liability and burdensome reporting obligations, through no fault of the American’s own,” according to the suit.

Leave a Comment