The Breakdown - A Win for Privacy as Tornado Cash Addresses are Unsanctioned

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, March 24th, and today we are talking about a huge victory for the crypto industry and privacy more broadly. Before we get into that, however, if you're enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the Show notes, we go to bit.ly slash breakdown pod. All right, friends, well, the Treasury has dropped tornado cash from the sanctions list,

Starting point is 00:00:45 but there's a lot more to the story. On Friday, the Treasury's Office of Foreign Assets Control or OFAC removed tornado cash from the sanctions list. In a press release, the Treasury wrote, we have exercised our discretion to remove economic sanctions against tornado cash. We remain deeply concerned about the significant state-sponsored hacking and money laundering campaign conducted by the Democratic People's Republic in North Korea. They warned that the Treasury will continue to closely monitor transactions that, quote, may benefit

Starting point is 00:01:10 malicious cyber actors or the DPRK, and U.S. persons should exercise caution before engaging in transactions that present such risks. In comments that demonstrate the difficulty of navigating this issue amid the administration's new position on crypto, Treasury Secretary Scott Besant added, digital assets present enormous opportunities for innovation and value creation for the American people. Securing the digital asset industry from abuse by North Korea and other illicit actors is essential to establishing U.S. leadership and ensuring that the American people can benefit from financial innovation and inclusion. By way of background, Tornado Cash was sanctioned in August 2022, after becoming the favored money laundering vehicle for North Korean hackers. Since then,

Starting point is 00:01:49 Coinbase, Coin Center, and a host of other individual plaintiffs have been fighting the Treasury in court. In January, a judge ruled that sanctioning Tornado Cash fell outside the scope of the Treasury's powers, and therefore the sanctions must be removed. Specifically, the ruling was that immutable smart contracts are not property, so can't be the subject of sanctions in the same way as bank accounts, financial assets, or physical property like yachts or cars. The Friday statement from Treasury removed dozens of eth addresses associated with tornado cash, so theoretically, U.S. citizens are now free to interact with the protocol again. However, Zach XBT warned that the main front end is still compromised,

Starting point is 00:02:21 and there are numerous fake frontends attached to wallet drainers. In other words, while the threat of being locked up for sanctions violations is gone, using the protocol is still very risky unless you're interacting directly with the smart contracts. Still, this is undeniably a major victory for those who have been fighting for the right to financial privacy in the crypto space. Jeff Park of Bitwise tweeted, the U.S. government lifting tornado cash from the sanctions list is the first real deeply meaningful win for the movement of crypto, absolutely monumental. Juan Manuel Sobrawl, the community lead for Ethereum Uruguay wrote,

Starting point is 00:02:51 Tornado Cash is no longer sanctioned. A key moment, code is speech, not crime. Software itself isn't the enemy, how it's used is. The freedom to program must be protected. developers are starting to fork tornado cash onto new infrastructure, seeing as the protocol is open source. Gunboats, a developer working on Mega-Eath said, I thought, maybe someone should try to deploy it on the hottest thing right now. There is no change in code needed, and that's really a good thing. Carter McAllister, a contributor to Alliance Dow, has also deployed a tornado cash fork. He added, quote, counter-measures against North Korean depositors,

Starting point is 00:03:21 namely needing to draw a silly mustache on Kim Jong-un's face and write something derogatory about the dictator before the transaction will go through. The mood was celebratory over the weekend. D.C. investor wrote, The Tornado Cash-O-FAC reversals may be the biggest legal and policy developments so far in a sea of massive developments over the past few months. Big props to CoinCenter, Coinbase, and all the individuals who stepped up to sue the government for their right to transact privately.

Starting point is 00:03:43 Bologi Shrinivasa tweeted, Privacy wins Tornado Cash is legal. Peter Van Valkenberg, the executive director of Coin Center, however, caution that we're not out of the woods yet, tweeting, after countless posts, meetings with members of Congress and agency staff, critical letters written to Treasury from leaders of both parties, and two lawsuits, the tornado cash contracts have been delisted. We won. But even with the sanctions, gone, the fight is not over. Days after the sanctions, Alexei Pricev was arrested in the Netherlands. He would be held for months without trial. Later, Roman Storm was arrested in the U.S. and charged absurdly with unlicensed money transmission.

Starting point is 00:04:15 Perzzev is currently out on house arrest while he waits an appeal in the Netherlands, while Storm is set to go on trial next month in New York. Storm commented, Although Treasury's decision sets crucial precedent, the SDNY prosecutors still haven't dropped their case against me. So while we have won a big battle, the war is far from over. I look forward to the community's continued support as I head to trial, and my legal team seeks a dismissal from the judge or acquittal by the jury. In updating the sanctions list on Friday, the Treasury made minor modifications to founder Roman Seminov's entry, but he remains a sanctioned individual even though he never interacted directly with money launders. Variant Fund Chief Legal Officer Jake Chavinsky wrote,

Starting point is 00:04:49 Treasury has delisted tornado cash from sanctions, meaning U.S. persons can lawfully use the protocol again. Great. But Treasury did not delist Roman Seminoff, appearing to take the absurd view that it's okay to use non-custodial software, but not to create it. Not good enough. And so the really big question is what the Treasury plans to do next. This wasn't a situation where OFAC acknowledged they were in the wrong and made a course correction to get in line with the administration's pro-Crypto stance. The lawsuit is still in the interim period where the judge has made their verbal ruling and is waiting on proposed written orders from the parties. Over recent weeks, the agency filed various proposals with the court,

Starting point is 00:05:22 which would allow them to go back to the drawing board and find a legal way to reinstate the sanctions. Another filing was placed on the court docket on Friday. In this document, the Treasury claimed there was no need to proceed with formal orders because the sanctions had been removed, rendering the case moot. Coinbase Chief Legal Officer Paul Grewell commented, Power does not recede voluntarily. It gasps, then it gasps until it no longer can. The Treasury filed yet another late Friday pleading against tornado cash.

Starting point is 00:05:45 After grudgingly delisting tornado cash, they've now claimed they've mooted any need for a final court judge. judgment. But that's not the law, and they know it. Under the voluntary cessation exception, a defendant's decision to end a challenged practice, moots a case only if the defendant can show that the practice cannot, quote, reasonably be expected to recur. Grewill listed a 2024 precedent where the FBI removed someone from the no-fly list and produced a declaration that they would not be added back to the list once the case had been resolved. That wasn't good enough for the court who proceeded to enter final written orders. Gruewell commented, here, Treasury has likewise

Starting point is 00:06:15 removed the tornado cash entities from the SDN, but has provided no assurance that it will not relist tornado cash again. That's not good enough and we'll make this clear to the district court. Today's episode is brought to you by Crypto Tax Calculator. If you're looking for accurate crypto taxes with no guesswork, check out Crypto Tax Calculator. Get accurate CPA-endorsed tax reports with full support for IRS rules. For those who have fallen down the on-chain rabbit hole, CTC has you covered with more than 3,000 integrations. They have full support for defy staking and NFTs. Import directly to TurboTax or H&R block or share security. securely with your accountant. Create an account, import your sources, and review. It's that easy.

Starting point is 00:06:56 Hello, friends. I am thrilled to share that Ledger is once again partnering and sponsoring with the breakdown. Many of you know, but for those of you who don't, Ledger is the most secure hardware wallet for your crypto and logins. It's trusted by 7 million users and secures 20% of the world's digital assets. What's more, Ledger is a lot more than wallets. Over the recent years, they've built a comprehensive ecosystem of products and services, all of which are designed to make digital ownership more secure and accessible. You can buy your Bitcoin with Ledger and Ledger Live and so much more. Basically, not only did they want to keep your assets secure, they want you to be able to do more with them. Ledger's newest devices, the Ledger Stacks and Ledger Flex, introduced

Starting point is 00:07:33 the world's first secure touchscreens, making it easier and safer to manage your transactions and assets. Alongside Ledger Stacks and Ledger Flex, the company also launched the Ledger Security key app, offering a safer alternative to traditional passwords and enhancing your digital security. If you are in this space, you owe it to yourself to at least check out Ledger and their ecosystem what they have available to you. So thanks once again to Ledger for sponsoring the show. On the other hand, Crypto Critic J.P. Koenig noted something odd about the list of addresses removed from the sanctions list. He tweeted, OFAC was only required to delist tornado cash's immutable contracts, which is what the court ruled on, but it appears to have delisted all

Starting point is 00:08:10 tornado contracts today, even the mutable ones like the relay or registry. Why did OFAC over-compli? is, we don't know what's going on behind closed doors at the Treasury Department. There's the possibility that political appointees like Secretary Scott Besson have put their foot down in an attempt to roll back the entire policy. While the sanctions got a lot of press, they didn't do that much to slow down money laundering from North Korean hacks. Compare operations from the tornado cash era to the $1.5 billion by-bit hack that was moved into Bitcoin within a few weeks. Sanctions only restrict U.S. citizens, so they were always more about the chilling effect than anything else. We could also be seeing the Treasury trying to retain as much optionality moving forward

Starting point is 00:08:46 as possible. Someone in the chain of command clearly wants to be able to try again at a later date, either with tornado cash or the protocols that have sprung up in its wake. Their legal strategy appears to make it clear that they don't want a solid court ruling on the books even after they lost the case. This has always been an extremely complex issue where reasonable people can't actually disagree. It's not a particularly controversial take that money laundering is bad, and that serious measures where viable should be taken to slow down North Korean hacking operations. At the same time, the removal of tornado cash was a massive downgrade for on-chain privacy, and of course the implications for digital rights go far beyond this one case.

Starting point is 00:09:21 And adding even more complexity to this, we might not even get full resolution through court cases alone. One of the points the judge made in their ruling was that the sanctions were technically illegal and the Treasury should go to Congress if they want expanded powers. What the ruling didn't suggest is that those powers would be improper or unconstitutional. In other words, an L now could become a W later. if Treasury actually went and asked for the powers that it had deployed in a way the judge said wasn't technically allowed. Still, if we were going to be living in a world of complexity around these issues, I'd much rather have it be complexity but pointed to the side of the positive rather than

Starting point is 00:09:55 complexity pointed to the side of the negative. And so net net, it's been a good couple of days for on-chain privacy. Now, since today's theme was talking about where the Treasury stands, and it's all part of the broader unwind of the Biden administration-era policies, The one other story that I wanted to talk about today was that another pillar of Operation Choke Point 2.0 has been torn down with the OCC ending reputational risk assessments for banks. Financial institutions are officially scored along five major categories during oversight. Capital adequacy, asset quality, managerial quality, earnings quality, and liquidity. These are largely pretty objective factors other than managerial quality.

Starting point is 00:10:32 Since the Obama era, a sixth hidden criteria was established in regulatory handbooks, which is reputation risk. the logic goes that a bank with a bad reputation might generate negative headlines and suffer a bank run as a result. Somewhere along the way, this was twisted into a silent mandate to avoid disfavored industries or suffer a regulatory downgrade and the increased compliance costs that come with it. During Obama's version of Operation Chokepoint, this was payday lenders, gun stores, and the sex industry, among others. During Biden's presidency, the reputation risk was squarely about crypto and fintech. In a statement, acting comptroller of the currency, Rodney Hood said, the OCC's examination process has always been rooted in ensuring appropriate risk management

Starting point is 00:11:09 processes for bank activities, not casting judgment on how a particular activity may fare with public opinion. The OCC has never used reputational risk as a catch-all justification for supervisory action. Focusing future examination activities on more transparent risk areas, improves public confidence in the OCC's supervisory process, and makes clear the OCC has not and does not make business decisions for banks. The statement noted that references to reputation risk have been removed from OCC handbooks. One of the interesting things coming out of the unwind of chokepoint policies is more data about just how much fintech has been suppressed in the U.S. The Claros group published a study comparing community banks who have fintech incentives and those who don't. They found that, on average,

Starting point is 00:11:49 community banks with fintech programs, paid 15 cents more on compliance for every dollar of revenue. Claros noted the same change in compliance costs wasn't observable from the major banks. Austin Campbell, the CEO of WSPN payments commented, punchline. If you like having to wait in line at the bank, using paper checks and freezing our financial system in the 1970s, you were a strong supporter of the Biden-in-min approach to financial regulation. If you want to use the internet ever even once, you were not. Ben Fam of Strive funds commented, there's about to be a banking boom in fintech and crypto, access to capital like never before, especially attractive loans and debt financing. Hopefully all banks are treated fairly in regulations

Starting point is 00:12:26 and policy don't disproportionately benefit big banks. Does this mean once and for all that operation chokepoint is over? Not quite yet, according to Custodia Bank's CEO, Caitlin Long. She said, it's premature to say that debanking is over. There are two crypto-friendly banks under examination by the Fed right now. An army of examiners was sent into these banks, including the examiners from Washington, a literal army just smothering the banks. Touching on how long this will take to change, Long added, the Fed is the outlier and the Fed is still controlled by Democrats. Trump won't have the ability to appoint a new Fed governor until January 2026, so therefore you can see the breadcrums leading up to a potentially big fight. Because if the OCC and FDIC overturned their

Starting point is 00:13:04 anti-crypto guidance but the Fed does not, where does that leave us? We will of course continue to keep track of these changes. It is not mutually exclusive to say that things are headed decidedly in the right direction, but there is a lot of fight that remains. For now that that is going to do it for today's breakdown. Appreciate you listening as always and until next time, be safe and take care of each other. Peace.

The Breakdown - A Win for Privacy as Tornado Cash Addresses are Unsanctioned

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