FT Cryptofinance: Crypto, sanctions and the First Amendment

Welcome to this week’s edition of the FT’s Cryptofinance newsletter. Today, we’re looking at crypto mixing services and rights enshrined in the US Constitution.

The hallowed First Amendment probably wasn’t the territory the US Treasury had in mind when it imposed sanctions on crypto mixing service Tornado Cash this summer.

In August the department had enough of Tornado, claiming it was used to launder more than $7bn and being a channel of choice for North Korea-backed hackers to evade sanctions. Mixers such as Tornado obscure the trail of transfers that would typically be publicly accessible on the digital ledgers that underlie cryptocurrencies.

The results were pretty tough. All transactions passing through Tornado Cash’s virtual desk were blocked if they involve US users or are conducted anywhere in or through the country. Everyone got the message: if you’re American, don’t go near it.

Crypto purists were predictably less than impressed, claiming familiar grievances such as government over-reach and the trampling of individuals’ financial privacy rights.

They’re now taking their complaints a step further. This week Coin Center, a crypto-focused non-profit research and advocacy group based in Washington, filed a lawsuit against the Treasury and its Office of Foreign Assets Control (Ofac), alleging it does not have the authority to impose sanctions on Tornado Cash.

It has been joined by crypto investor David Hoffman, software developer Patrick O’Sullivan, and “John Doe”, who was described in the filing as a human-rights activist who has been donating crypto to Ukraine.

Will Coin Center get anywhere with suing one of the world’s most powerful financial crime agencies? And if not, why even bother?

The lawsuit didn’t really address the substance of the Treasury’s allegations: that Tornado was being used as a channel for money laundering.

Instead, Coin Center’s case revolves around its view that they are protected by the First Amendment, which protects the rights of groups (and individuals within them) to exercise free speech. The criminalisation of Tornado Cash, the plaintiffs allege, violate the constitutional rights of users who “need it to protect their private associations”. John Doe fears Russian agents would learn of his pro-Ukrainian activity and harm him and his family.

This line of attack might not be enough. “I’m quite sceptical of the First Amendment claim . . . I don’t think there is precedent to support a right to make fully anonymous donations through a particular currency,” Peter Fox, partner at Scoolidge, Peters, Russotti & Fox, told me over email.

Admittedly, Coin Center doesn’t help itself. It asserts that it is not a criminal, and never transacts with criminals or terrorists. Yet it also says: “It is impossible to tell whose assets are being sent to Coin Center’s account when they come from a Tornado Cash address.” Coin Center declined to comment on how these statements can coexist.

Fox said private associations can be maintained without the use of Tornado Cash, or any other crypto mixing service. “Why don’t you cut them a cheque? That’s pretty private.”

Coin Center’s strongest position may be its allegation that the Treasury and Ofac have overstepped their remit because Tornado Cash has also been used for payments between ordinary Americans just wanting to pass clean cash between each other, privately. Fox said that point could be a problem for the government.

Maybe the battle is not over the present but the future. “Whether Coin Center is successful or not, it would only enhance our blockchain laws and policy to increase public discourse around open source software tools generally, including those like Tornado Cash,” said Teresa Goody Guillén, partner at US law firm BakerHostetler.

But perhaps, as America’s Founding Fathers knew, some truths are self-evident.

As John Reed Stark, former chief of the SEC’s Office of Internet Enforcement, told me this week: “The industry constantly screams out for regulatory clarity, for certainty, for specifics, but whenever they get it they file a lawsuit saying it’s not what they like.”

What’s your take on Coin Center’s case against the Treasury? Email me at

Weekly highlights

  • As the saying goes: when it rains it pours, and Solana-land is very wet. Last week I asked where the network would go after a swath of recent failures, and this week Solana-based DeFi platform Mango Markets was hacked for $100mn. As it joined the ever-lengthening list of DeFi hacks, the Mango Markets team clarified that “oracle price reporting worked as it should have” — a detail that will surely inspire much confidence in the alleged future of finance.

  • France made crypto headlines again this week after welcoming exchange platform to its shores. The platform’s registration as a Digital Asset Service Provider under the Autorité des Marchés Financiers (AMF) follows Binance’s registration in the EU member state months earlier.

  • Meta continues to push the limits of technology. If you’re planning on moving your life to Meta Horizon Worlds, you can look forward to . . .*checks notes* . . . having legs. One observant Twitter user pointed out that Madden, a popular American football video game, achieved the same feat in 1994, which I feel takes the legs out from beneath Meta’s latest innovation.

  • Scrutiny over crypto’s apparent role in blunting economic sanctions isn’t going away. This week exchange platform Bittrex agreed to pay $29mn to settle enforcement cases with US authorities for “apparent violations” of sanctions against countries such as Iran, Cuba and Syria. Read about it here.

  • Binance has been accused by the co-owner of a UK subsidiary of filing a “grossly inaccurate” annual report for a British entity associated with the crypto exchange. The accusation comes following Binance’s public spat with the Financial Conduct Authority last year. Read more here.

Soundbite of the week: Tether

The undetailed commercial paper that backed the world’s biggest stablecoin has long attracted speculation. No more.

“Tether is proud to announce that we have completely eliminated commercial paper from our reserves. This is evidence of our commitment to back our tokens with the most secure, liquid reserves in the market.”

Nothing to do with the 4.4 per cent interest on offer in short-term US Treasuries, then? Let’s hope this accelerates the long-awaited audit too.

Data mining: Coinbase woes continue

Whether it is job cuts, internal strife or spats with regulators, 2022 has been a difficult year for Coinbase.

Recent data published by analytics platform CryptoCompare show momentum is yet to turn round as it prepares to announce third-quarter earnings on November 3. Monthly spot trading volume on the exchange was down 17 per cent to $48bn compared with $120bn at the start of the year. Spot trading volume has now hit its lowest point since December 2020.

Additional data from CryptoCompare show that monthly spot trading volume for Binance, FTX and OKX increased during the same period.

Perhaps the documentary on Coinbase and its co-founder Brian Armstrong will change people’s minds. Mind you, The Atlantic wasn’t a fan.

Read the full article here

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