The Breakdown - Unsatisfying Clarifications on the Tornado Cash Sanctions

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. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, September 14th, and today we are catching up on everything going on in the crypto world. One quick note, before we dive in, though, there are two ways to listen to the breakdown podcast. You can listen on the Coin Desk podcast network where it comes out every afternoon and also features other great CoinDesk shows, or you can listen on the breakdown only feed, which comes out a few hours later in the evening. Wherever you listen, if you would take a minute to go leave a review or a rating, I would so appreciate it.

Starting point is 00:00:50 It makes a huge difference in terms of who discovers the show, and I appreciate each and every one of you who takes the time to do that. Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. And finally, I want to tell you about CoinDesk's new event, the investing in the business, digital enterprises and asset summit or ideas. Ideas is designed to facilitate capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience where you can source and invest in the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass and register today at coindesk.com slash ideas. All right folks, well, there is a lot going on right now.

Starting point is 00:01:30 markets are reacting to one of their worst days in years. In fact, yesterday was the worst day in the stock market since June 2020. All 30 stocks in the Dow Jones Industrial Average declined. All 11 sectors of the S&P 500 were down. Overall, the Dow fell 3.9%. The S&P 500 was down 4.3% and NASDAQ was down 5.2%. That left those indices down 14, 17, and 26% down on the year respectively. Now, to the extent that there was any good news or a bright spot at least in this, The action basically amounted to a retracing of the gains of the previous four sessions leading into what was an unexpectedly hot inflation print. There wasn't a surge in volatility yesterday, which suggests that this wasn't really panic

Starting point is 00:02:12 selling so much as an acknowledgement that the optimism leading into the inflation numbers was just incorrect. It showed us yet again that to get any sort of sustained rally, there's just going to need to be a fundamental change in the underlying conditions, and really clear evidence that inflation is receding. Today, stocks are basically choppy trading around where they landed yesterday. They've been buoyed slightly by the producer price index decreasing for the second month in a row, although even that's more complicated than it first appears. Either way, that is not where we are focusing today. As all of the crazy macro stuff has been happening, it's been quite busy in crypto as well. First of all, it's Ethereum merge day, so my show

Starting point is 00:02:50 tomorrow will be all about that. And I think whether you're a full-blown Ethereum who has been awaiting this day for years, or you're a bitcoiner convinced that proof of stake is doomed to repeat the problems of fiat. There is simply not. no denying how significant this day is for the crypto industry as a whole. So I'm excited to dig into it with you guys tomorrow. But first, let's catch up on a few other things that have been going on. As of this morning, the hunt for Doe Kwan is on, literally. The initial Wall Street Journal headline this morning was Manhunt begins for Doe Kwan, crypto developer behind failed stable coin Terra U.S.D. A spokesperson for the Seoul Southern District Prosecutor's Office confirmed that it had

Starting point is 00:03:25 obtained arrest warrants for six individuals including Doe. The six are being charged with violating the Capital Markets Act. Garlam Juan explains, quote, Korea's financial security crime team found evidence of, quote, fraudulent transactions in the form of investment contract securities. Basically, they believe that these investment contract securities were created and benefited from, but no actual business was done. Arrest warrant is valid for one year and will try tactics such as Interpol cooperation and invalidating passports to bring them in. Now, it is crazy to me how many Luna 2.0 shills there still are on Twitter saying this doesn't mean anything and blah, blah, but that is obviously a significant enforcement update. Also around the realm of enforcement, yesterday we got

Starting point is 00:04:03 some additional information on tornado cash. The U.S. Treasury has finally started to provide clarification regarding their sanctions on tornado cash. On Tuesday, the Treasury Department's Office of Foreign Asset Control or OFAC updated its FAQ to provide guidance to the crypto industry and individual investors on how they can comply with sanctions. The FAQ encouraged any U.S. persons who still have tokens held on tornado cash to apply for a license to deal with the funds. This process includes extensive identification and transaction data to confirm that no other sanctioned entity was involved in the transactions. OFAC stated that they would have a favorable licensing policy towards these transactions. The FAQ also noted that anyone who had received small amounts

Starting point is 00:04:41 of tokens from Tornado cash during the dust attacks would still have a duty to report the transaction to OFAC, but that OFAC would not, quote, prioritize enforcement against anyone who had delayed reporting. The FAQ further included a brief rundown of OFAC's view on the legality of sanctions against tornado cash. OFAC believes that it can include, quote, specific virtual currency wallet addresses associated with blocked persons on the sanctions list. A spokesperson for the Treasury said, U.S. persons must comply with these sanctions. More broadly, we call on the cryptocurrency industry to do its part to prevent illicit activity,

Starting point is 00:05:11 nation-state or otherwise, as that is what responsible innovation requires. This would include ensuring adequate cybersecurity measures, implementing know-your-customer measures, and complying with sanctions in anti-money laundering obligations. Treasury looks forward to continue dialogue with the virtual currency industry on these issues. Jake Chivinsky, the head of policy at the Blockchain Association, wrote a summary thread. Today, OFAC published FAQs related to tornado cash sanctions. We're glad that OFAC has hurt our concerns and appreciate their effort to clarify these important

Starting point is 00:05:38 issues, yet. The FAQs don't fully address the collateral damage caused by the designation. The FAQs acknowledge that U.S. persons should presumptively be granted license to recover frozen funds. Good. But the FAQs require each person to file their own individual license request. This shouldn't be necessary. U.S. persons shouldn't have to apply for their own money.

Starting point is 00:05:57 OFAC may be quickly overwhelmed by a massive number of requests from people who aren't sanctions experts and shouldn't have to hire lawyers or pay legal fees just to get their money back. The right result is a general authorization for law-abiding U.S. persons to withdraw funds. The FAQs say OFAC won't prioritize enforcement against dusting attack victims. Also good. But the FAQ still say victims are technically required to file initial blocking reports and subsequent annual reports. Enforcement remains on the table if those reports are delayed.

Starting point is 00:06:23 These reports are unlikely to help OFAC achieve its goals, so dusting attack victims shouldn't be burdened with filing them. De-prioritizing prosecution isn't enough. OFAC shouldn't consider prosecuting victims at all. The right result is a clear policy of non-enforcement. The final FAQ asks what is prohibited as a result of OFAC's designation of tornado cash, but does not clearly answer that question. It says interacting with open source code itself isn't prohibited, but doesn't explain what that means for software developers and others. Although today's FAQs are less than fully satisfying, we take them as a positive, if mainly symbolic gesture, recognizing the collateral damage of tornado cast sanctions on innocent people. P.S., there's an entirely

Starting point is 00:07:01 separate question as to whether OFAC's designation of tornado cash was lawful or not. That question is now the subject of pending litigation, so I wouldn't expect OFAC to address it in public by FAQs or otherwise. That's a matter for the courts now. Peter Van Valkenberg, the director of research at Coin Center, writes, a number of half measures that attempt to address free speech and due process issues without actually doing much. No response to the fundamental counter argument that it's outside their statutory authority to block something that isn't a transaction with a person or property. To be clear, this is a fieric victory. No one expected OFAC to actually come right out and ban code publication. Instead, they continue banning the usage of tools residing in specific addresses,

Starting point is 00:07:39 even though that also chills speech and is outside their statutory authority. Indeed, one of the things that people are most upset about is this approach to dusting. Collins-Belton writes, What's most interesting about this is that it suggests OFAC is going to double down on its approach of sanctioning contracts and less challenged legally. There's also confirmation of their views about this prohibition extending to dusting and requiring reporting. Very simple. To withdraw from Trenato Cash, you just need to apply for this license and docks your entire life to us. No problem, right? But their statement on dusting really takes the cake. Note that they are not saying they will not enforce, but rather that they will simply not prioritize enforcing delayed reporting of

Starting point is 00:08:14 dust attacks. The implication is that failing to report at all is still punishable. I think optimistic interpretations were and remain misguided. Even with indications that OFAC didn't realize what they were doing initially, I remain of the belief that a judicial challenge to this overreach is the only way to get a real resolution on the books. At Dystopia Breaker writes, big come in and register energy. So clearly not a report that is going to end this issue. Nexto is a security-first platform built for the long run with everything you need for your crypto. Five key fundamentals, including real-time auditing and insurance on custodial assets, safeguard your funds, making Nexo the right place for you to buy, exchange, and borrow against your assets safely.

Starting point is 00:09:03 Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk.

Starting point is 00:09:45 The breakdown is sponsored by FTX US. FtX US is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCs, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show.

Starting point is 00:10:25 Next, we head over to El Salvador. Obviously, we've been paying attention to the El Salvador Bitcoin bond program, which appears to be currently stalled out. We're not sure if it's lack of demand or infrastructure or whatever. But in either case, when it comes to traditional sovereign debt, the government of El Salvador has issued an offer to buy back a portion of that debt. On Monday, the South American country announced an offer for its outstanding bonds maturing in 2023 and 2025, each worth a total of $800 million. The offer is to pay 91 cents on the dollar for 2023 debt and

Starting point is 00:10:56 54 cents on the dollar for 2025 debt, in addition to interest accrued. The government has limited the offer to $360 million worth of outstanding debt. Prior to the announcement, the debt was trading around $0.65 on the dollar for 2023 debt and $26 on the dollar for 2025 debt, heavily implying default. The value of the debt has collapsed by almost 30% in the last year amid negative sentiment around the country's Bitcoin activities. Al Salvador's Bitcoin purchases are down nearly 50%, although they represent a small portion of the government's overall finances. President Naibu Kelle tweeted, Today we have officially launched the purchase offer for all our external debt due from 23 to 2025. All holders of bonds of the Republic of El Salvador can access this public involuntary

Starting point is 00:11:35 repurchase. The goal is to market buy all available debt from 2023 to 2025, considering there is a sizable portion of it not available for purchase. So there's not too much to get into here just seems to be a further attempt on El Salvador's part to get out of the IMF rat race. Moving further south, we head to Uruguay. That country's executive branch have submitted a bill to Congress intending to give the Central Bank of Uruguay the legal power to regulate virtual assets. The bill would amend the charter of the central bank to bring virtual asset service providers under the supervision of the financial services superintendent. It would also amend the securities market law to treat crypto assets as book entry securities, which can only be

Starting point is 00:12:12 issued by a registered entity that complies with requirements of law and regulation. The bill states, quote, with the proposed amendments both the previously regulated subjects and the new incorporated entities that operate with virtual assets will be subject to the supervisory and control powers of the Central Bank of Uruguay. The bill would now need to pass both chambers of parliament to become law. Now, it's hard as an outsider, even as someone who spent a bunch of time in Uruguay, to understand if this is a pro-crypto bill or just as a legal framework setting bill. Either way, it's part and parcel of the fact that every country in the world is finally trying to figure out what the heck they're going to do when it comes to crypto. In Argentina, right next door, their tax collection agency has conducted raids for the first time in search of secret crypto mining operations. Three raids took place last week. One in San Juan, which uncovered crypto mining equipment in a fruit cooling area of an agricultural producer,

Starting point is 00:12:59 one in Buenos Aires, where a crypto mining company was operating out of a property registered for other purposes. Argentina has no official register for crypto mining operations and very few companies operating legally. Most decide to operate in secret in order to evade taxes and to take advantage of Argentina's residential electricity provision, which is heavily subsidized compared to industrial rates. If you want to hear more about Argentina, go listen to last week's Long Read Sunday. Now finally, staying in Latin America, a new report from blockchain infrastructure firm and stablecoin issuer Paxos has found that Latin American populations are increasingly turning to cryptocurrency to protect their wealth. U.S. back stablecoins are a particularly popular

Starting point is 00:13:35 option and are seen as more trustworthy than Latin American fiat currencies that have a history of hyperinflation. The report states that Latin American consumers receive $60 billion worth of cryptocurrency in 2021. Latin America is currently undergoing another round of high inflation, average at around 12% for the region, which is giving citizens an increased reason to seek more stable currencies. The report also cites a MasterCard report that suggested that a third of Latin American consumers had used stable coins for everyday purchases. Once, as Cesare said in the report, the consumers in Latin America have suffered their currencies depreciation and capital controls for a long time. So they were quick to understand the advantages of crypto and embrace it.

Starting point is 00:14:14 Now, one of the interesting things to me, which is obviously much out of the depth of this specific show, is to what extent politicians in Washington thinking about stable coins and how they relate to the U.S. dollar actually understand their potential to give legs to the dollar-led global order for another generation. There are huge parts of the world, Latin America in particular, where what people want is just dollars. For many, stablecoins are a close enough substitute, and that's something that you have to think. There is game theory for interested politicians, thinking about the future of the global economy

Starting point is 00:14:47 and where the American dollar sits within it. Finally, Canada saw some Bitcoin action as well. The Conservative Party of Canada has elected pro-Bitcoin MP Pierre Poliev as the new leader of the opposition on Saturday in a landslide. He received 68% of the party vote, which was well ahead of his nearest rival at 16%. Poliev will likely lead his party in the 2025 Canadian election against incumbent Justin Trudeau, giving Canadians the opportunity to elect a pro-Bitcoin Prime Minister. Poliyev has been outspoken about the Bank of Canada's monetary policy, as well as the fiscal

Starting point is 00:15:18 decisions of the government over the last few years. He made waves in March when he said government is ruining the Canadian dollar, so Canadians should have the freedom to use other money such as Bitcoin. So far as financial reform platform includes firing the governor and auditing the central bank, as well as stopping the development of a CBDC. What makes this extra interesting right now is that Prime Minister Trudeau specifically referred to Poileev's Bitcoin advocacy following his election, saying in a tweet, we've made every effort to work with all parliamentarians over the years and will continue to do

Starting point is 00:15:46 so. But we'll also call out questionable, reckless economic ideas because Canadians deserve responsible leadership. Telling people they can opt out of inflation by investing in cryptocurrency is not responsible leadership. Fighting against life-saving vaccines is not responsible leadership. Opposing the pandemic supports that save jobs and helped families is not responsible leadership. Now, I know absolutely nothing about Canadian politics. And hopefully if you've listened to

Starting point is 00:16:09 this show for long enough, you know that being pro-Bitcoin would not be enough to make me like a politician on its own. However, what makes this interesting is that if Poliev really is the Canadian candidate, it will see Bitcoin become a national issue. Whether it's something that actually moves the political needle is a whole different discussion, but it's still another marker of how far things have come. For now, I want to say thanks again to my sponsors, nexus.io, chain analysis, and FTX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Unsatisfying Clarifications on the Tornado Cash Sanctions

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