Casey Wagner

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In another big win for the crypto industry, a panel of federal judges last night sided with Tornado Cash users. They ruled the US Treasury Department unlawfully sanctioned the cryptocurrency mixing service back in 2022.&nbsp;



There’s nothing like a rare loss for the government heading into a long holiday weekend.&nbsp;



A quick refresher: The Treasury’s Office of Foreign Assets Control (OFAC) <a href="https://home.treasury.gov/news/press-releases/jy0916?utm_source=substack&amp;utm_medium=email">sanctioned Tornado Cash</a> in August 2022, claiming the mixer had been used to launder more than $7 billion in cryptocurrency.&nbsp;



In September 2022, six Ethereum blockchain users (with financial backing from Coinbase) <a href="https://blockworks.co/news/ofac-tornado-cash-lawsuit-details-crypto-industrys-sanction-concerns">filed a lawsuit</a> against OFAC <a href="https://blockworks.co/news/coin-center-tornado-cash">challenging its authority</a> to designate Tornado Cash as a specially designated national (SDN). A Texas federal judge <a href="https://blockworks.co/news/judge-backs-us-treasury-tornado-cash-sanction">eventually sided</a> with the Treasury, ruling in September 2023 that the sanctions were permitted, as “person” is defined as an “individual or entity.”&nbsp;



Coinbase and the Tornado Cash users <a href="https://blockworks.co/news/tornado-cash-fans-appeal">appealed the decision</a> to the Fifth Circuit Court of Appeals, which brings us to last night’s ruling.&nbsp;



Judge Don Willett — one of three circuit judges on the panel — wrote that Tornado Cash, which operates by executing immutable smart contracts, cannot be considered “property.” It is therefore outside OFAC’s authority, he added.&nbsp;



The Treasury has not yet commented on the decision or revealed whether or not it intends to appeal, in which case the Supreme Court could weigh in.&nbsp;



Willett did concede that there are “real-world downsides of certain uncontrollable technology falling outside of OFAC&#8217;s sanctioning authority.” But even so, he added, Congress is responsible for updating the legislation.&nbsp;



Tuesday’s decision notably follows a loss in another Tornado Cash-related case. A bid from Tornado Cash co-founder Roman Storm to dismiss the US government’s case against him <a href="https://blockworks.co/news/tornado-cash-motion-to-dismiss-denied">was denied</a> last September. Judge Katherine Polk Failla rejected the defense’s narrative that the founders were being targeted simply for “<a href="https://blockworks.co/news/on-the-margin-newsletter-tornado-cash">writing code</a>.”&nbsp;



“As I understand the charges in the indictment, the Tornado Cash enterprise was not an altruistic venture,” Failla added during a telephone conference in September. “Among other things, the indictment alleges that Mr. Storm and other Tornado Cash founders solicited approximately $900,000 in financing from a venture capital fund in exchange for an expectation that the funds would receive a share of future profits from the Tornado Cash service.”



Two Tornado Cash founders, Storm and Roman Semenov, <a href="https://blockworks.co/news/roman-semenov-tornado-cash-ofac-list">were charged</a> in August 2023 with money laundering and sanctions violations related to their role in creating the mixing service. Storm is scheduled to be arraigned on Dec. 9, according to a scheduling ruling earlier this month. However, the latest development in the case against OFAC could impact this timeline and/or the charges.&nbsp;



Storm’s legal team did not immediately respond to our requests for comment. That’s not shocking, given that it’s Thanksgiving Eve and a late-night ruling from a higher court may have just upended the entire case.&nbsp;



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Forward Guidance newsletter

Appeals court rules against OFAC, says Tornado Cash sanctions unlawful 

A group of Democratic senators sent a letter to the US Department of Treasury and the Internal Revenue Service asking for information on when new cryptocurrency tax guidance will come as a deadline quickly approaches.&nbsp;



Sens. Elizabeth Warren, D-Mass., Bernie Sanders, D-Vt., Robert Casey, D-Penn., and Richard Blumenthal, D-Conn., sent the letter Tuesday.&nbsp;



Under the Infrastructure Investment and Jobs Act, signed into law in November 2021, the Treasury and IRS have until the end of this year to finalize new rules to help close an estimated “$50 billion crypto tax gap,” the letter said.&nbsp;



“Without quick action, your agencies are at risk of failing to meet their congressionally-mandated deadlines for implementation of a final rule,” senators wrote in the letter. “We urge you to act swiftly to implement strong tax reporting rules for cryptocurrency brokers.”&nbsp;



The crypto industry has also <a href="https://blockworks.co/news/tax-experts-best-practices-irs">become antsy waiting for guidance</a>, particularly with regards to how the IRS defines a “broker.” Industry observers have claimed the broker definition is broad enough to potentially include miners and software developers. This classification could pose challenges in meeting regulatory disclosure obligations for these entities, those people say.



“What we are hoping, from an industry perspective, is that the updated 6045 regulations will have different qualifications based on the type of activity,” Erin Fennimore, vice president of tax solutions at TaxBit, said. “It will hopefully make it clear that not everyone effectuating a transfer of a digital asset should be subjected to broker reporting.”&nbsp;



The new regulations will be issued under Sections 6045 and 6045A, according to an <a href="https://www.irs.gov/pub/irs-drop/a-23-02.pdf">announcement</a> from the IRS earlier this year.&nbsp;



The senatorial letter comes days after the IRS issued new guidelines, updating Section 6045 regarding crypto staking, in which the agency ruled that staking income — regardless of if the gains are realized — will be taxed as income.&nbsp;



“If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer&#8217;s gross income in the taxable year,” the IRS’ rule states.



The senators ask that the agencies inform them on their timeline for issuing rules and how long members from the public will be able to comment on new rule proposals.



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Democrat senators want Treasury, IRS to pick up the pace on new crypto tax rules

Shalini Nagarajan

The US Department of the Treasury under President Joe Biden is sketching the technology that can be used to create a central bank digital currency (CBDC), even as lawmakers remain split on whether to go ahead with the plan.



Policymakers are currently deliberating on the merits of a CBDC and what it would entail. Nellie Liang, the undersecretary of the Treasury for domestic finance, delivered a <a href="https://home.treasury.gov/news/press-releases/jy1314" target="_blank" rel="noreferrer noopener">speech</a> at an event hosted by the Atlantic Council think tank on Wednesday, outlining the administration’s plans on CBDCs.



CBDCs are a type of digital currency that would be issued by the US Federal Reserve and would therefore be official digital units of account.&nbsp;



“The Fed has also emphasized that it would only issue a CBDC with the support of the executive branch and Congress, and more broadly the public,” Liang said.



She noted that CBDCs are among the options for upgrading the legacy capabilities of central bank money. Another one is real-time payment systems, like the <a href="https://www.federalreserve.gov/paymentsystems/fednow_about.htm" target="_blank" rel="noreferrer noopener">FedNow Service,</a> which the Fed expects to launch this year.



“Even as policy deliberations continue, we are engaging in the technological development of a CBDC so that we would be able to move forward rapidly if a CBDC were determined to be in the national interest.”



The FedNow Service will provide interbank clearing and settlement that will allow fund transfers to process almost in real-time under a 24x7x365 system. It will be available to all depository institutions in the US. The target release period for this plan is between May to July this year.



Unlike the FedNow Service, a CBDC would involve both a new form of central bank money and a new set of payment rails, Liang said.



“Both real-time payment systems and CBDCs present opportunities to build a more efficient, competitive, and inclusive US payment system,” she added.



A working group set up to discuss the possible launch of a digital dollar will now meet regularly to develop an initial set of findings and recommendations. It will be made up of leaders from the Treasury, the Federal Reserve and some White House offices like the National Economic Council and National Security Council, and be expected to provide interim public updates.



Implications for global financial leadership, national security and financial inclusion are some of the areas the group will study.



The Treasury official made it clear that the relevant agencies under the federal government are still not reassured by the concept of having a CBDC in the first place, but that the US still has an interest in exploring their interaction with the existing financial system.



Liang&#8217;s comments come about a year after President Biden signed an <a href="https://blockworks.co/news/biden-signs-crypto-executive-order-promoting-responsible-innovation">executive order</a> that asked federal agencies to lay a roadmap to regulate crypto and identify risks for innovation, including the role of a CBDC. Under that order, the Treasury was asked to partner with interagency colleagues towards a unified digital asset strategy.



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CBDC

US Treasury Weighs Prospects For CBDC Adoption

<div id="highlights-block_6347c4885d2fa" class="highlights">
 <ul>
 <li>Users that are “dusted” still face criminal liability and reporting obligations, suit alleges</li>
 <li>Outcome of lawsuit will be precedent-setting in whether the Treasury can continue sanctioning code</li>
 </ul>
 
</div>



Non-profit blockchain advocacy group Coin Center has filed a lawsuit against the US Treasury over its Tornado Cash sanctions, saying the move effectively criminalizes American citizens wanting to protect their privacy while using their own cryptoassets.



Other parties in Coin Center’s Wednesday <a href="https://www.coincenter.org/app/uploads/2022/10/1-Complaint-Coin-Center-10-12-22.pdf" target="_blank" rel="noreferrer noopener">complaint</a> are user Patrick O’Sullivan, New York-based investor David Hoffman and a Ukrainian supporter anonymously using the name “John Doe.”



Hoffman stated that after the Treasury’s sanctions, an unknown individual sent cryptoassets to his public address through Tornado Cash, consequently embroiling him in the situation.



“Ethereum users like Mr. Hoffman have no ability to reject incoming transfers. So the criminalization of Tornado Cash empowered someone else to implicate Mr. Hoffman and force reporting obligations on him by causing him to receive an asset from a sanctioned entity,” the filing said.&nbsp;



“And it has licensed anyone else who wishes to harass or inconvenience Mr. Hoffman to continue to send crypto assets through Tornado Cash to Mr. Hoffman’s publicly known addresses, each time triggering potential liability and reporting obligations.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">I&#39;m suing the Department of Tresury! I got dusted from <a href="https://twitter.com/TornadoCash?ref_src=twsrc%5Etfw">@TornadoCash</a>, and now every year of my life I am FORCED file a report reaffirming that I&#39;m not a criminal. I don&#39;t intend to waste my time like that. David Hoffman vs Janet Yellen Let&#39;s dance <a href="https://t.co/GVCMuzvpEH">pic.twitter.com/GVCMuzvpEH</a>&mdash; DavidHoffman.bedrock 🦇🔊🏴 (@TrustlessState) <a href="https://twitter.com/TrustlessState/status/1580253035804372993?ref_src=twsrc%5Etfw">October 12, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



So far, there is no known example of the Treasury pursuing such a case.



Coin Center also states that the Treasury exceeded its regulatory authority because Tornado Cash is not a “person,” rather, it is a “privacy tool beyond the control of anyone.”



Coin Center’s lawsuit comes after its director of research <a href="https://cms.blockworks.co/coin-center-condemns-tornado-cash-sanctions/" target="_blank" rel="noreferrer noopener">said</a> the OFAC’s authority is granted by Congress in the International Emergency Economic Powers Act (IEEPA). The act empowers OFAC to sanction “property in which some foreign country or national has an interest.” Tornado Cash, a software tool, doesn’t come under that remit, Coin Center argues.



Debate around how OFAC can place sanctions against a code has been a key discussion ever since. Crypto exchange Coinbase funded a <a href="https://www.reuters.com/markets/currencies/coinbase-backs-lawsuit-against-us-treasury-over-tornado-cash-sanctions-2022-09-08/" target="_blank" rel="noreferrer noopener">similar lawsuit</a> against the Treasury, claiming that its jurisdiction does not extend to software code and smart contracts. In that suit, six Tornado Cash users claimed the Treasury overstepped its authority in sanctioning the mixer.



<h3 class="wp-block-heading">Sanctions mark evidence of mounting geopolitical pressure</h3>



The US Treasury’s Office of Foreign Assets Control <a href="https://cms.blockworks.co/us-treasury-bans-citizens-from-using-mixing-service-tornado-cash/" target="_blank" rel="noreferrer noopener">added Tornado Cash</a> and 45 related Ethereum wallet addresses to its list of sanctioned entities in August, making it illegal for any US person to engage with the service in any manner.



Those sanctions led to <a href="https://cryptoslate.com/defi-protocols-aave-uniswap-balancer-ban-users-following-ofac-sanctions-on-tornado-cash/" target="_blank" rel="noreferrer noopener">crypto platforms</a> banning accounts associated with the crypto mixing service. Moreover, it created the risk of user addresses being banned and put centrally managed funds in jeopardy.



Crypto mixers provide transaction anonymity by commingling funds, thereby obfuscating the source from which they came. Such services have come under increased scrutiny after <a href="https://cms.blockworks.co/treasury-official-insists-crypto-mixers-can-obstruct-russian-sanctions/" target="_blank" rel="noreferrer noopener">concerns about sanctioned Russian entities</a> using crypto to make it hard to trace the source and flow of funds.&nbsp;



The Treasury also alleges that North Korea-sponsored hacking collective Lazarus Group stole over $620 million in cryptocurrency from the <a href="https://cms.blockworks.co/axie-infinity-developers-made-some-trade-offs-that-enabled-625m-ronin-breach/" target="_blank" rel="noreferrer noopener">Ronin Bridge protocol</a>.



Experts say long-term implications of the sanctions will take time to play out.



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Coin Center

Coin Center Sues Over Treasury’s Tornado Cash Sanctions

<div id="highlights-block_633b5741bdc59" class="highlights">
 <ul>
 <li>Regulatory heads met to share thoughts on new crypto risk report </li>
 <li>Chairs agree that joint cooperation between agencies is a must </li>
 </ul>
 
</div>



A US financial regulator chaired by Treasury Secretary Janet Yellen determined Monday that cryptocurrencies could “pose risks to US stability, under certain conditions,” per one participant.&nbsp;



The Financial Stability Oversight Council (FSOC) <a href="https://www.youtube.com/watch?v=ypyCkrZc_KY" target="_blank" rel="noreferrer noopener">met</a> Monday to discuss its new report on digital assets, designed as a framework for regulators and financial rulemakers. 



Jonathan Rose, an economist and adviser to the Federal Reserve Bank of Chicago, warned of potential systemic risks.



“Those conditions are first, if their interconnections with the traditional financial system or their overall scale were to grow,” Rose said. “And second, if that growth were to occur without adherence to or being paired with appropriate regulation, including the enforcement of the existing regulatory structure.”&nbsp;



The FSOC — which includes voting members Federal Reserve Chair Jerome Powell and SEC Chair Gary Gensler — came to be in 2010, in the aftermath of the last financial crisis, and is tasked with identifying and protecting against outsized risks to the rails of traditional finance.&nbsp;



The FSOC’s findings detail the “sources of acute instability arising from speculation driven crypto asset prices, interconnections within the crypto asset ecosystem, operational vulnerabilities, funding mismatches and run risk,” according to Rose.&nbsp;



The FSOC is particularly concerned about stablecoins, volatility and how crypto tokens writ large should be classified, Rose added.&nbsp;



In <a href="https://www.sec.gov/news/statement/gensler-statement-fsoc-meeting-100322" target="_blank" rel="noreferrer noopener">prepared remarks</a>, Gensler slammed Bitcoin’s anonymous creator, Satoshi Nakamoto, for not having “faith in the financial sector overseen by folks like us, sitting around this table.”



Gensler again emphasized the need for the SEC and related agencies to work in tandem with Congress to establish a stringent regulatory framework for the nascent sector, a callback to <a href="https://cms.blockworks.co/gensler-on-board-with-cftc-taking-over-bitcoin-oversight/" target="_blank" rel="noreferrer noopener">earlier comments</a> from the SEC chief. 



The report suggests 10 steps for lessening the risk cryptoassets purportedly pose, including passing legislation to regulate stablecoins.&nbsp;



The group also said that whatever regulatory body ends up overseeing stablecoins needs to have the authority to monitor and control interoperability between stablecoins, in an effort to prevent monopolies overseen by a handful of large issuers.



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Federal Reserve

Crypto Could ‘Pose Risks to US Stability’ – Fed Adviser

<div id="highlights-block_632ac3896cbe1" class="highlights">
 <ul>
 <li>Russia is reportedly drafting crypto regulations after international restrictions</li>
 <li>The Treasury has identified more than 20 Russian entities attempting to evade sanctions using crypto</li>
 </ul>
 
</div>



Imposing sanctions on cryptocurrency mixers would help strengthen the US government’s response in preventing entities from skirting sanctions, according to a Treasury official.



Elizabeth Rosenberg, assistant secretary for terrorist financing and financial crimes, said at a <a href="https://www.banking.senate.gov/hearings/tightening-the-screws-on-russia-smart-sanctions-economic-statecraft-and-next-steps" target="_blank" rel="noreferrer noopener">Tuesday hearing</a> on Russia that adding crypto mixers like Tornado Cash to its list of Specially Designated Nationals would effectively strengthen current sanctions.



“When [sanctions] can serve as a deterrent to any criminal that would seek to use a mixer in order to launder their funds — the funds of the proceeds of corruption, or other criminal activity — that&#8217;s an effective avenue we can use in order to signal that we cannot tolerate money laundering. So whether that&#8217;s for a Russian criminal actor, an Iranian, a North Korean, or wherever they may come from,” she said.



Russia is <a href="http://government.ru/news/46500/" target="_blank" rel="noreferrer noopener">reportedly</a> considering setting rules around cross-border stablecoin payments by the end of this year. Prime Minister Mikhail Mishustin believes the financial system needs a readjustment in the face of sanctions and restrictions.



When Sen. Elizabeth Warren asked if it was possible for Russia to evade sanctions using cryptocurrencies, Rosenberg said it was. Anonymity-enhancing mixers, which obscure the trail of funds to conceal their origin, are another point of concern for lawmakers.



The efficacy of privacy techniques, including mixing services, for money laundering was disputed by co-founder of analytics firm Chainalysis, Jonathan Levin, <a href="https://youtu.be/VcmIETdtZWw?t=252">during Senate testimony</a> in March.



“We have done extensive work in tracking large sums of money through mixers that have led to the arrests of people and the disruption of their activities,” Levin told Sen. Warren, noting that global liquidity through mixers was too small to allow would-be sanctions-evaders to effectively obfuscate funds.



“It is possible to trace the source of money and where it&#8217;s flowing,” Rosenberg said Tuesday, but added, “the detractor from that would be anonymity-enhancing technologies.”



Last month, the US Treasury <a href="https://cms.blockworks.co/us-treasury-bans-citizens-from-using-mixing-service-tornado-cash/" target="_blank" rel="noreferrer noopener">added</a> crypto mixing service Tornado Cash and 45 related Ethereum addresses to its blocked list. That meant individuals in the US are prohibited from dealing with them.



However, the move has drawn criticism from several crypto commentators, with some saying it’s a bad idea for authorities to intervene and try to criminalize a smart contract, harming law-abiding US citizens seeking to protect their privacy in the process.



The Senate committee’s meeting was convened to discuss “Tightening the Screws on Russia” as a result of aggression in Ukraine and the agency’s next steps in enforcing economic sanctions.&nbsp;



The Treasury has already identified <a href="https://home.treasury.gov/news/press-releases/jy0731" target="_blank" rel="noreferrer noopener">Russian entities</a> that have been attempting to circumvent sanctions using crypto. Earlier this month, it <a href="https://home.treasury.gov/news/press-releases/jy0954" target="_blank" rel="noreferrer noopener">designated</a> 22 people and two entities for abetting Russia’s further invasion of Ukraine.



In April, the Office of Foreign Assets Control designate a virtual currency mining company for the first time, along with commercial bank Transkapitalbank and a 40-member network led by oligarch Konstantin Malofeyev.



Chainalysis found in July that <a href="https://blog.chainalysis.com/reports/crypto-mixer-criminal-volume-2022/" target="_blank" rel="noreferrer noopener">about 10%</a> of all funds sent from illicit addresses were received by mixers in 2022.



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russia

Treasury Official Insists Crypto Mixers Can Obstruct Russian Sanctions

Sebastian Sinclair

David Canellis

<div id="highlights-block_62f9c087b20b4" class="highlights">
 <ul>
 <li>Sun claimed he was sent 0.01 ETH from an anonymous source via Tornado Cash, leading to Aave blocking his blockchain address</li>
 <li>Privacy advocates say the Treasury&#8217;s move to ban Tornado Cash is a violation of human rights</li>
 </ul>
 
</div>



Prominent crypto users reported being blocked by web apps of major DeFi (decentralized finance) protocols over the weekend, as the ecosystem continues reckoning with recent Tornado Cash sanctions.



Tron founder Justin Sun claimed he was &#8220;officially blocked&#8221; from lending protocol Aave after someone &#8220;randomly&#8221; sent him a small amount of ether via <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">crypto mixer</a> Tornado Cash. 



More than 600 <a href="https://twitter.com/PeckShieldAlert/status/1558426649196392448" target="_blank" rel="noreferrer noopener">addresses</a> were hit with the same 0.01 ETH ($19.25) &#8220;dust attack,&#8221; according to analytics unit PeckShield, including crypto exchanges and public figures such as Coinbase CEO Brian Armstrong and Jimmy Fallon.



Last Monday, Tornado Cash was placed on the Office of Foreign Assets Control&#8217;s blacklist over its usage by North Korean hacker crew Lazarus Group to launder stolen digital assets. The ban made it illegal for US citizens to interact with its Ethereum smart contracts.



Read more: <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">Coin Mixers and Privacy Coins: Can They Resist Censorship?</a>



OFAC in total sanctioned 45 Ethereum addresses associated with Tornado Cash, many of them USDC contracts, leading MakerDAO co-founder Rune Christensen to <a href="https://cms.blockworks.co/makerdao-plans-to-yolo-usdc-into-eth/" target="_blank" rel="noreferrer noopener">float ditching the stablecoin</a> from its treasury altogether. 



Days later, Dutch financial crimes agency FIOD <a href="https://cms.blockworks.co/netherlands-arrests-suspected-tornado-cash-dev-days-after-us-sanctions/" target="_blank" rel="noreferrer noopener">arrested a 29-year-old</a> Tornado Cash developer in Amsterdam over their suspected involvement in facilitating money laundering via the platform.



Sun <a href="https://twitter.com/justinsuntron/status/1558397647165091840?s=20&amp;t=mn2AWJKRtgIM9YCb79zYrA" target="_blank" rel="noreferrer noopener">tweeted</a> his ban on Friday. &#8220;This address is blocked on app.aave.com because it is associated with one or more blocked activities,&#8221; the screenshot reads. Ethereum proponent Anthony Sassano said he experienced similar treatment.



Aave later responded to the social media outcry with its own Twitter thread. The firm explained it had implemented a API maintained by compliance startup TRM Labs to ensure it&#8217;s in line with US sanctions. 



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">4/8 We have been made aware that the API may have made incorrect calls about which wallet should be included in block-lists, in this case including those wallets that were sent “dusted” ETH by third parties interacting with the Tornado Cash contracts without consent.&mdash; Aave (@AaveAave) <a href="https://twitter.com/AaveAave/status/1558537742497337344?ref_src=twsrc%5Etfw">August 13, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div><figcaption>Aave later clarified that TRM Labs&#8217; API did not make incorrect calls, but rather Aave&#8217;s front-end implementation was responsible for the errors.</figcaption></figure>



TRM Labs&#8217; API identifies &#8220;all wallets that have interacted with Tornado Cash contracts post-sanctions, even so-called &#8216;dusted&#8217; self-custodial wallets,&#8221; Aave said.



This explains why some users were unable to access the protocol&#8217;s front-end, even though its web app is hosted by peer-to-peer protocol Inter-Planetary File System.



Web apps for other popular DeFi protocols, including decentralized exchange Uniswap and automated market maker Balancer, also <a href="https://cryptoslate.com/defi-protocols-aave-uniswap-balancer-ban-users-following-ofac-sanctions-on-tornado-cash/" target="_blank" rel="noreferrer noopener">reportedly</a> blocked users flagged by TRM Labs&#8217; database.



&#8220;The team [Aave] mitigated these issues by immediately addressing this, and we continue to evaluate responsible and reasonable risk mitigation given the circumstances,&#8221; Aave said. Sassano later tweeted to confirm his block had been lifted.



<h3 class="wp-block-heading">DeFi still weighing full impact of Tornado Cash sanctions </h3>



While their web apps rely on centralized services, Aave, Uniswap and Balancer are non-custodial, peer-to-peer platforms powered by immutable smart contracts.



This means anyone at all can spin up alternative front-ends that don&#8217;t utilize automated block lists like TRM Labs&#8217;, allowing blocked users to interact with their permissionless protocols. 



Still, seeing high-profile individuals such as Sun indirectly impacted by the Treasury&#8217;s recent ban is somewhat troubling. The department&#8217;s move has been called into question by activists and <a href="https://twitter.com/ErikVoorhees/status/1556716202394693633?s=20&amp;t=HOszweeeWz71RYhI1GOjpA" target="_blank" rel="noreferrer noopener">proponents,</a> who say &#8220;<a href="https://coincenter.substack.com/p/us-sanction-of-tornado-cash-curtails" target="_blank" rel="noreferrer noopener">hair-raising precedent</a>&#8221; is an &#8220;unconstitutional restriction on free speech.&#8221;



Privacy advocates argue Tornado Cash is intended to preserve sensitive information relating to a user&#8217;s wallet, including the amount stored, where funds are <a href="https://twitter.com/RezaJafery/status/1556751888896258049?s=20&amp;t=HOszweeeWz71RYhI1GOjpA" target="_blank" rel="noreferrer noopener">sent and received</a>, and general DeFi activity.



Digital rights advocacy group Fight for the Future last week wrote that the Treasury made a &#8220;clumsy attempt&#8221; to sanction Tornado Cash, compromising human rights and the US&#8217; first amendment.



&#8220;The Internet is feeling the chilling effects of this choice: the&nbsp;<a href="https://github.com/tornadocash" target="_blank" rel="noreferrer noopener">open source code</a>&nbsp;used to run Tornado.cash has been taken down from Github,&#8221; the group said. &#8220;Unfortunately it seems that such an effect is exactly what the US government was seeking.&#8221;



Commonplace sanctioning of smart contracts could have wide-reaching repercussions for DeFi and the blockchain industry writ large, <a href="https://twitter.com/LeXpunK_Army/status/1558869220615766016?s=20&amp;t=HOszweeeWz71RYhI1GOjpA" target="_blank" rel="noreferrer noopener">proponents say</a>.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">There is nothing wrong with using a tool just to have your privacy better protected. Using TC is like using VPN or Tor to help improve your online privacy. The creators of these technologies are not doing anything wrong. They simply created a tool to help improve privacy&mdash; Bobby Ong (@bobbyong) <a href="https://twitter.com/bobbyong/status/1558276760617177088?ref_src=twsrc%5Etfw">August 13, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Fireblocks CEO Michael Shaulov believes technology built over the past decade to catch bad actors has led to increased threat intelligence sharing between industry and law enforcement. Although, the systems in place are not perfect, he said.



&#8220;In theory, Tornado Cash has a lot of interesting properties for anonymizing your transactions,&#8221; Shaulov told Blockworks in an interview. &#8220;But in practice, we all know that the people that were using it for a sizable part of the activity were not the good guys.&#8221;



Shaulov mused on the idea of a continuously updated database &#8220;at the wallet level,&#8221; with the addresses made public in a bid to aid other platforms and protocols from engaging with tainted wallets.



Shaulov, who spent four years in Israeli intelligence developing monitoring software for law enforcement, likened the Treasury&#8217;s actions against Lazarus and Tornado Cash to that of a game of &#8220;cat and mouse&#8221; across DeFi.



&#8220;Chasing after bad people on the internet is not a new thing,&#8221; he said, adding that banning protocols like Tornado Cash wasn&#8217;t a real solution.&#8221;



&#8220;It&#8217;s open source,&#8221; Shaulov said in relation to Tornado Cash&#8217;s code. &#8220;What prevents the next person from basically spinning that contract another 50,000 times?&#8221;



Shaulov then suggested increased intelligence sharing between all related parties, such as Tornado Cash, Uniswap and the Treasury, who could then programmatically blacklist all wallets belonging to terrorists, for example.



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Aave

DeFi Web Apps Block Users Hit by Tornado Cash ‘Dust Attack’

<div id="highlights-block_62f1222becc92" class="highlights">
 <ul>
 <li>Tornado cash is now on the Treasury’s list of services US individuals cannot use</li>
 <li>The sanctions come as money moved via crypto mixing services increased in 2022</li>
 </ul>
 
</div>



In its first on-chain decentralized finance protocol sanction, the US Treasury Department added decentralized <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">cryptocurrency mixing service</a> Tornado Cash to its blocked list, according to documents released Monday. 



The Office of Foreign Asset Control <a href="https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20220808" target="_blank" rel="noreferrer noopener">added Tornado Cash</a> and 45 related Ethereum wallet addresses to the Specially Designated Nationals (SDN) list, meaning that their “assets are blocked and U.S. persons are generally prohibited from dealing with them,” according to the <a href="https://home.treasury.gov/policy-issues/financial-sanctions/specially-designated-nationals-and-blocked-persons-list-sdn-human-readable-lists" target="_blank" rel="noreferrer noopener">Treasury Department</a>.



US Secretary of State Anthony Blinken initially mistakenly identified Tornado Cash as “a U.S.-sanctioned, DPRK state-sponsored hacking group, used by the DPRK to launder money,” in a subsequently-deleted tweet.&nbsp;


<div class="wp-block-image">
<figure class="aligncenter"><img decoding="async" src="https://lh6.googleusercontent.com/wYDklnJIAO26QiX_Ew2_4fQxwmm2qQoxhwG7mAHkfRUJ1CJpgi_xQbSeFEGsWlmNdn7KsGZQoXMixOH_Umdq-w6Z9MVjXqil_2krWVJZmyozVs1o7MinZ0PT5WEDFXkCFRj5DZd5G53PR47o7kFG3OU" alt=""/></figure></div>


Secretary Blinken later clarified that Tornado Cash was merely used by a North Korean hacking group to launder money.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">We’ll continue to aggressively pursue actions against currency mixers laundering virtual currency for criminals. Today, <a href="https://twitter.com/USTreasury?ref_src=twsrc%5Etfw">@USTreasury</a> sanctioned virtual currency mixer Tornado Cash, which has been used to launder money for a U.S.-sanctioned DPRK state-sponsored cyber hacking group.&mdash; Secretary Antony Blinken (@SecBlinken) <a href="https://twitter.com/SecBlinken/status/1556677862345801728?ref_src=twsrc%5Etfw">August 8, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The sanctions come as 2022 has seen an uptick in the use of <a href="https://cms.blockworks.co/illicit-crypto-moving-to-mixers-on-pace-to-double-in-2022/" target="_blank" rel="noreferrer noopener">crypto mixing services</a>, which allow users to <a href="https://cms.blockworks.co/the-purpose-and-perils-of-crypto-privacy-tools/" target="_blank" rel="noreferrer noopener">conceal the transaction history</a> of certain cryptocurrencies by pooling and mixing them together with other users’ funds.&nbsp;



The 30-day moving average of value received by mixers reached an all-time high of nearly $52 million worth of crypto on April 19, according to <a href="https://blog.chainalysis.com/reports/cryptocurrency-mixers/" target="_blank" rel="noreferrer noopener">a report by Chainalysis</a> published in July. This is roughly double the volumes seen at the same time in 2021.



Mixers have also come under increased scrutiny as concerns about <a href="https://cms.blockworks.co/russian-financiers-could-turn-to-crypto-to-sidestep-us-european-sanctions/" target="_blank" rel="noreferrer noopener">sanctioned Russian</a> entities using crypto to circumvent the rules mounts. 



Read more: <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">Coin Mixers and Privacy Coins: Can They Resist Censorship?</a>



This is a developing story.



Updated Aug. 8, 2022, 12:50 pm ET.



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ether

US Treasury Sanctions Crypto Mixing Service Tornado Cash

<div id="highlights-block_62cfdf59a8cbe" class="highlights">
 <ul>
 <li>Michael Barr played advisor to the embattled Ripple Labs in 2015</li>
 <li>Fed chief Jerome Powell has said Barr’s role is “charged with setting the regulatory agenda”</li>
 </ul>
 
</div>



The Senate has confirmed former Ripple advisor Michael Barr as a top banking watchdog at the US Federal Reserve, after he received bipartisan support on Tuesday.



President Joe Biden <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/15/statement-from-president-biden-on-his-intent-to-nominate-michael-barr-to-serve-as-vice-chair-for-supervision-of-the-federal-reserve/" target="_blank" rel="noreferrer noopener">nominated</a> Barr to the role of vice chair for supervision of the Federal Reserve in April owing to his career in consumer protection and his role in shaping the 2010 Dodd-Frank Act following the 2008 financial crisis. 



Barr, once <a href="https://www.wsj.com/articles/biden-is-expected-to-tap-michael-barr-as-comptroller-of-the-currency-11611196272" target="_blank" rel="noreferrer noopener">pegged</a> to serve as comptroller of the currency, was also a top Treasury Department official during former President Barack Obama’s administration. He secured a 66-28 vote by the Senate, exceeding the simple majority of 50 votes required for confirmation.&nbsp;



“Today’s confirmation of Michael Barr as Vice Chair for Supervision of the Federal Reserve is important progress for my plan to tackle inflation and for sound oversight as we transition to steady and stable growth,” Biden said in a <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/07/13/statement-from-president-biden-after-senate-confirmation-of-michael-barr-to-the-federal-reserve/" target="_blank" rel="noreferrer noopener">statement</a>.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Confirmed, 66-28: Executive Calendar #976 Michael S. Barr to be Vice Chairman for Supervision of the Board of Governors of the Federal Reserve System for a term of four years.&mdash; Senate Cloakroom (@SenateCloakroom) <a href="https://twitter.com/SenateCloakroom/status/1547307273072017410?ref_src=twsrc%5Etfw">July 13, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In 2015, Barr became an <a href="https://ripple.com/ripple-press/ripple-labs-names-michael-s-barr-as-advisor/" target="_blank" rel="noreferrer noopener">advisor</a> to Ripple Labs — which is at the center of a major lawsuit with the Securities and Exchange Commission that argues the company sold XRP tokens worth <a href="https://www.sec.gov/news/press-release/2020-338" target="_blank" rel="noreferrer noopener">$1.3 billion</a> as unregistered securities. He’s no longer listed as an advisor, and it isn’t clear when he left as he hasn’t listed professional experiences on <a href="https://www.linkedin.com/in/msbarr/" target="_blank" rel="noreferrer noopener">LinkedIn</a>. Ripple didn’t respond to Blockworks’ request for comment by press time.



In any case, the Fed will now have a full board for the first time since 2013, at a time when the US tackles its <a href="https://cms.blockworks.co/inflation-surges-again-in-june-bitcoin-slides-stocks-open-lower/" target="_blank" rel="noreferrer noopener">worst inflation</a> in 40 years. Barr&#8217;s role had been vacant since late 2021 after Fed governor Randal Quarles <a href="https://www.reuters.com/world/us/feds-randal-quarles-resign-end-december-2021-11-08/#:~:text=His%20term%20as%20head%20of,for%20supervision%20expired%20in%20October." target="_blank" rel="noreferrer noopener">stepped down</a> in October.&nbsp;



As a US central bank supervisor, Barr is expected to scale daily oversight of both the biggest lenders and smaller financial firms that play a part in the overall economy. He’ll also be in charge of developing regulatory policies for cryptocurrencies and stablecoins, which have been <a href="https://cms.blockworks.co/biden-signs-crypto-executive-order-promoting-responsible-innovation/" target="_blank" rel="noreferrer noopener">priorities</a> for the Biden administration.



The Fed’s chairman Jerome Powell <a href="https://www.rev.com/blog/transcripts/fed-chair-jerome-powell-press-conference-transcript-september-22-market-update" target="_blank" rel="noreferrer noopener">said</a> last year that he would accept the authority of the person in the supervision role as it is “charged with setting the regulatory agenda.”



Barr, who joins the Fed from the University of Michigan’s Gerald F. Ford School of Public Policy, <a href="https://www.banking.senate.gov/imo/media/doc/Barr%20Testimony%205-19-22.pdf" target="_blank" rel="noreferrer noopener">said in a May hearing</a> that he’s committed to softening inflation to the Fed’s 2% target and ensuring the financial system is “robust and resilient.”&nbsp;



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cryptocurrency

Former Ripple Advisor Michael Barr Will Supervise the Federal Reserve

<div id="highlights-block_62200f71c9e13" class="highlights">
 <ul>
 <li>Democrats in the US are seeking answers from the Department of the Treasury over its effectiveness to monitor Russian evasion of sanctions using crypto</li>
 <li>Questions come as bitcoin&#8217;s rise against the ruble has skyrocketed in recent days</li>
 </ul>
 
</div>



Four Democratic Senators have asked the Treasury to define its strategy for monitoring and enforcing crypto sanctions compliance following concerns Russia may be using digital assets to evade its economic penalties.



In a <a href="https://www.warren.senate.gov/imo/media/doc/2022.03.01%20Letter%20to%20Treasury%20re%20OFAC%20crypto%20sanctions%20enforcement.pdf" target="_blank" rel="noreferrer noopener">letter</a> penned to Treasury Secretary Janet Yellen on Wednesday, Senators Elizabeth Warren, Mark Warner, Sherrod Brown and Jack Reed voiced their concerns that &#8220;criminals&#8221; and &#8220;rogue states&#8221; are using crypto as a &#8220;new means to hide cross-border transactions for nefarious purposes.&#8221;



The crisis in Ukraine has all but reenergized the US&#8217;s efforts to crack down on what it perceives as criminal-related crypto activity.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;Concerns have become even more urgent given the sanctions imposed on Russia after its invasion of Ukraine and reports that Russian entities are preparing to blunt some of the worst effects of the sanctions that have been levied on the country by using the array of “cryptocurrency-related tools as its disposal,&#8221; the letter said.</blockquote>



The Treasury defines sanctions as <a href="https://home.treasury.gov/system/files/136/Treasury-2021-sanctions-review.pdf" target="_blank" rel="noreferrer noopener">economic and financial tools</a> of &#8220;first resort&#8221; used to address a number of threats to national security, foreign policy and the economic health of the US.



Following Russia&#8217;s invasion of Ukraine, the West has imposed economic restrictions on the former Soviet state, hoping to apply enough pressure elicit a ceasefire and troop withdrawal.



Sanctions, while not yet fully implemented, are already sending shockwaves across the global financial ecosystem with some assets fairing better than others.



As a result, Russia&#8217;s largest lender, Sberbank, lost 95% of its value on the London stock exchange on Wednesday following a run on deposits. Other London-listed stocks, including Lukoil, Novatek and Rosneft, also suffered significant hits. Russia&#8217;s ruble collapsed and is now trading at less than a penny ($0.0098).



In anticipation of the senators concerns, Jake Chervinsky, head of policy at the Blockchain Association, a Washington-based industry group, <a href="https://twitter.com/jchervinsky/status/1498786025438650369" target="_blank" rel="noreferrer noopener">took to Twitter</a> to argue that crypto cannot be used to mitigate sanctions.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/ Russia can&#39;t &amp; won&#39;t use crypto to evade sanctions. Concerns about crypto&#39;s use for sanctions evasion are totally unfounded. They fundamentally misunderstand: &#8211; how sanctions work &#8211; how crypto markets work &#8211; how Putin is actually trying to mitigate sanctions I&#39;ll explain 🧵&mdash; Jake Chervinsky (@jchervinsky) <a href="https://twitter.com/jchervinsky/status/1498786025438650369?ref_src=twsrc%5Etfw">March 1, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In particular, he wrote, &#8220;US persons around the world are cutting ties with Russian [Specially Designated Nationals And Blocked Persons] right now, regardless of what payment systems they were using previously.&#8221;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;There&#8217;s zero reason to think crypto&#8217;s existence will convince any of them to willfully violate sanctions laws, risking fines &amp; jail time.&#8221;</blockquote>



Meanwhile, crypto is <a href="https://cms.blockworks.co/market-wrap-bitcoin-eth-see-massive-pump-as-russian-ruble-crumbles/" target="_blank" rel="noreferrer noopener">reported</a> to have responded favorably to affected Russian oligarchs and businesses seeking financial shelter.



&#8220;Trading volumes between the Russian ruble and Bitcoin have spiked to their highest level since May 2021 in recent days following the wave of sanctions announcements,&#8221; the senators said in their letter.



<h3 class="wp-block-heading">Democrats request more from crypto community </h3>



The letter also provides specific examples of what the US sees as the crypto community&#8217;s disregard for financial law. 



One such instance includes mining company Marathon Digital&#8217;s refusal and then backflip in May over its decision to process transactions from wallets listed on the Office of Foreign Assets Control&#8217;s (OFAC) Specially Designated Nationals and Blocked Persons List.



OFAC is the Treasury&#8217;s financial intelligence and enforcement agency focused on issuing and enforcing sanctions based on US foreign policy and national security objectives.



Another instance included the mention of DeFi and its use of smart contracts, that seek to supplant brokers, banks and financial intermediaries, as a growing threat to financial stability and sanctions controls.



&#8220;The cryptocurrency industry may not be fulfilling its responsibility to comply with US sanctions,&#8221; the letter reads. &#8220;<a href="https://home.treasury.gov/system/files/126/virtual_currency_guidance_brochure.pdf" target="_blank" rel="noreferrer noopener">OFAC’s October guidance</a> notes that many “members of the virtual currency industry implement OFAC sanctions policies and procedures months, or even years, after commencing operations.&#8221;



As such, the four Democrats said they are seeking information from the Treasury over measures the department is intending to take in relation to the OFAC&#8217;s guidance to enforce sanctions compliance by crypto participants.



Questions were also put forth by the senators to the Treasury including how OFAC works with foreign governments to ensure crypto does not avoid sanctions, challenges faced by the agency under the October guidance and how many times self-disclosed sanctions violations have occurred.



A further two questions were asked relating to how DeFi&#8217;s (decentralized finance) growth has contributed to &#8220;maligned actors'&#8221; ability to avoid sanctions and the agency&#8217;s capacity to enforce them as well as what further legal tools and funding are required to avoid Russia&#8217;s evasions.



The senators are requesting a response to their questions along with information by no later than March 23.



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Bitcoin

US Democrats Ask Treasury What Effect Cryptoassets Have on Russian Sanctions

<div id="highlights-block_61804c619eebf" class="highlights">
 <ul>
 <li>The President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a report on stablecoins Friday </li>
 <li>The regulatory bodies agree that stablecoin issuers need greater oversight </li>
 </ul>
 
</div>



A group of United States regulatory bodies called on Congress to increase stablecoin oversight in a report released Monday.&nbsp;



“Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options. But the absence of appropriate oversight presents risks to users and the broader system,” said Secretary of the Treasury Janet Yellen in the report. “Current oversight is inconsistent and fragmented, with some stablecoins effectively falling outside the regulatory perimeter.”&nbsp;



The President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) collaborated on the report, which covered a range of potential risks and use cases.&nbsp;&nbsp;



“The potential for the increased use of stablecoins as a means of payments raises a range of concerns, related to the potential for destabilizing runs, disruptions in the payment system, and concentration of economic power,” the report read.&nbsp;



If regulated properly, stablecoins could “support faster, more efficient, and more inclusive payments options,” the report acknowledges.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“I am not surprised by the report. I don&#8217;t think that regulation should be seen as an alarming event,” said David Tawil, president of ProChain Capital. “Regulations of stablecoins should be relatively simple and are necessary to give the public and regulators confidence in the various stablecoin offerings.”</blockquote>



The report asks Congress to establish guidelines as quickly as possible, including a policy that requires stablecoin issuers be insured banks.&nbsp;



“To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions,” the report states.&nbsp;&nbsp;



The report comes amid growing concerns over the nature of how stablecoins are backed. The one-to-one backing most issuers claim is <a href="https://cms.blockworks.co/coinbase-circle-to-move-usdc-reserves-out-of-high-risk-investments/">likely not the reality</a> when it comes to the assets supporting coins like Tether (USDT) and USD Coin (USDC). 



<a href="https://cms.blockworks.co/hindenburg-research-targets-tether-with-1m-bounty-program/" target="_blank" rel="noreferrer noopener">Most recently</a>, forensic financial research and famous short selling firm Hindenburg Research announced a <a href="https://hindenburgresearch.com/tether-tos/" target="_blank" rel="noreferrer noopener">Tether Bounty Program</a>, which will reward up to $1 million for anyone who can provide deeper insight into the backing of the largest stablecoin in the digital asset space.



&#8220;This is exactly the type of regulation we as an industry were expecting — anyone claiming to be a US dollar backed token needs to have a US dollar in the bank. And not just any bank, a US regulated bank,” said Matthew Gould, CEO and Founder of Unstoppable Domains. “The devil is in the details, but this proposal on the surface is reasonable and is likely to bring a whole new class of companies into the stablecoin space: banks!”

US Regulators: Stablecoin Issuers Should Follow Same Rules as Banks

Jacquelyn Melinek

Liz Coyne

<div id="highlights-block_61773272ee07a" class="highlights">
 <ul>
 <li>SEC Chairman Gary Gensler has been warning about impending crypto restrictions, especially stablecoins which he called “poker chips,” during a Washington Post virtual event</li>
 <li>Federal Reserve Chairman Jerome Powell has said that stablecoins pose a threat and exist within an “underdeveloped regulatory framework”</li>
 </ul>
 
</div>



On the heels of revelations that the US Securities and Exchange Commission (SEC) <a href="https://cms.blockworks.co/sec-subpoenaed-terra-founder-do-kwon-at-mainnet-2021/" target="_blank" rel="noreferrer noopener">served</a> Terra founder Do Kwon at an event in New York City in September, the commission is set to crack down on the $<a href="https://www.coingecko.com/en/categories/stablecoins" target="_blank" rel="noreferrer noopener">134.5 billion</a> stablecoin market, according to <a href="https://www.bloomberg.com/news/articles/2021-10-25/sec-gets-path-to-rein-in-stablecoins-as-u-s-weighs-new-rules" target="_blank" rel="noreferrer noopener">Bloomberg</a>.



Citing unnamed sources, Bloomberg reported that the US Treasury Department and other government agencies are expected to publish a report this week explaining the SEC’s authority over stablecoins and urging Congress to pass bills that regulate certain coins similarly to bank deposits.



The SEC, Commodity Futures Trading Commission and the Treasury Department did not respond to immediate requests for comment by Blockworks.



SEC Chairman Gary Gensler has been warning about impending crypto restrictions, especially stablecoins which he called “poker chips,” during a Washington Post virtual event, Blockworks previously <a href="https://cms.blockworks.co/secs-gensler-stablecoins-are-poker-chips/">reported</a>. Gensler also said he thinks digital assets have potential, but they are not immune to regulatory oversight.



Separately, in July, Federal Reserve Chairman Jerome Powell has said that <a href="https://cms.blockworks.co/most-fed-officials-say-inflation-goal-met-tapering-to-start-this-year/">stablecoins pose a threat</a> and exist within an “underdeveloped regulatory framework.” Committee members also remarked that these “new financial arrangements” lack structural maturity.&nbsp;



Powell has noted in the past that an establishment of a central bank-backed digital currency would make the market less reliant upon stablecoins, Blockworks <a href="https://cms.blockworks.co/powell-a-cbdc-would-make-cryptocurrencies-obsolete/" target="_blank" rel="noreferrer noopener">reported</a>. However, crypto enthusiasts have questioned whether a CBDC would work and whether it would function differently than the current fiat currency and system in place.&nbsp;



The report expected to come out this week could reinforce the comments made previously by US elected officials and continue to pave the way for new regulatory standards for stablecoins. “The report will also reaffirm that the Commodity Futures Trading Commission has a role in overseeing stablecoins,” Bloomberg reported.

Do Kwon

US SEC Set to Crack Down on Stablecoins in New Report

Sam Reynolds

<div id="highlights-block_610dad77086ca" class="highlights">
 <ul>
 <li> A fundamental misunderstanding of the technology behind blockchain is at the core of the issue with cryptocurrency tax language in the infrastructure bill, Sarson Funds’ Jahon Jamali told Blockworks </li>
 <li>Digital assets investors and stakeholders say the bill as it stands is simply unrealistic from a compliance perspective and will lead to an offshoring of infrastructure</li>
 </ul>
 
</div>



The fight to keep key elements of blockchain infrastructure such as nodes and wallets from being considered “brokers,” and be required to engage in tax reporting, now involves Treasury Secretary Janet Yellen as the <a href="https://www.washingtonpost.com/politics/2021/08/06/crypto-bitcoin-infrastructure-senate/" target="_blank" rel="noreferrer noopener">Washington Post</a> reported Friday.&nbsp;



But as Sarson Funds co-founder and fund manager Jahon Jamali explained to Blockworks, the fight is based on fundamental misunderstandings about the underlying technology that powers digital assets.



The <a href="https://cms.blockworks.co/senators-propose-infrastructure-bill-amendment-to-lighten-crypto-reporting-requirements/" target="_blank" rel="noreferrer noopener">amendment</a> put forward by Senators Ron Wyden (D-Ore.), Pat Toomey (R-Pa.) and Cynthia Lummis, (R-Wyo.) keeps the definition of crypto “broker” — and with that the subsequent tax implications — quite strict. Yellen is lobbying against this amendment, according to the Washington Post.



However, a rival bi-partisan camp of Senators Rob Portman (R-Ohio), Mark Warner (D-Va.) and Kyrsten Sinema, (D-Ariz.) proposed another amendment that would add a broad scope of reporting requirements to blockchain infrastructure providers, which FTX founder and CEO, Sam Bankman-Fried explained on Twitter earlier today.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1) More last minute updates on the crypto tax bill! For context: <a href="https://t.co/ABSlsX2Crd">https://t.co/ABSlsX2Crd</a>&mdash; SBF (@SBF_FTX) <a href="https://twitter.com/SBF_FTX/status/1423529349828030467?ref_src=twsrc%5Etfw">August 6, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



What has left many scratching their head is the explicit call out of proof-of-stake versus proof-of-work. While Bitcoin and Ethereum currently use proof-of-work, Ethereum is <a href="https://cms.blockworks.co/institutions-staking-eth-2-want-internet-bonds/" target="_blank" rel="noreferrer noopener">scheduled to move</a> to proof-of-stake as part of its shift to ETH2.



What’s more curious to many is that proof-of-work has long been criticized for its reliance on mining and miners due to the perceived carbon footprint. Now, the sudden support for proof-of-stake is a neck-snapping flip-flop.



“I think the pace of innovation is clearly moving faster than policymaking,” Jamali told Blockworks. “While in some ways it solidifies bitcoin as a mainstay of the US financial system, the tax-reporting requirements for proof-of-stake protocols demonstrate a clear lack of understanding on how the technology works.”



<h3 class="wp-block-heading">Yellen and bankers feeling the DeFi heat</h3>



Jamal also pointed out that part of this is a product of incumbent financial institutions facing “clear competition” from decentralized finance (DeFi).



Indeed, <a href="https://cms.blockworks.co/us-cbdc-prototype-ready-soon-but-will-anyone-use-it/" target="_blank" rel="noreferrer noopener">according to lobbying disclosures</a>, the American Bankers Association (ABA) spent nearly $3 million lobbying lawmakers during the fourth quarter of the year about a range of issues, including CBDCs and cryptocurrency.&nbsp;



“It seems that they’ve corralled support amongst some in DC,” Jamali said.



Other industry stakeholders have also pointed out that the impossible compliance requirements this bill proposes would put pressure on blockchain infrastructure providers to move offshore and shop around for favorable regulation.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“There&#8217;s a reason England doesn&#8217;t have any social media companies. There&#8217;s a reason France doesn&#8217;t have much of a financial services industry,” Preston Byrne, a <a href="https://twitter.com/prestonjbyrne/status/1423637356859559945" target="_blank" rel="noreferrer noopener">Partner at Anderson Kill</a>, and well-known voice in the crypto industry tweeted, referring to the former’s restrictive laws around free speech and the latter’s high taxes. “If the White House gets its way, there will be a reason that America doesn&#8217;t have a crypto industry.”</blockquote>



“This crypto bill happened because some staffer in a back room who has no idea how the tech works thinks that some Solidity code is going to send people 1099s,” he concluded.



Want more investor-focused content on digital assets?&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Join us</a>&nbsp;September 13th and 14th for the Digital Asset Summit (DAS) in NYC. Use code ARTICLE for $75 off your ticket.&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Buy it now</a>.