Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Tornado Cash has now entered the Washington spin cycle. The Treasury Department’s Aug. 8 sanctioning of the decentralized mixing service, which is used to obfuscate crypto transactions on the Ethereum blockchain, quickly exploded into a full-bore crisis for decentralized finance developers, privacy advocates and other pro-crypto groups who said it could be a harbinger of future crackdowns. Two weeks later, congressional leaders are starting to take note. “OFAC – they don't know how to deal with this thing,” said Rep. Tom Emmer (R-Minn.), who sent a letter on Tuesday to Secretary Janet Yellen demanding more information about the Treasury’s Office of Foreign Assets Control’s (OFAC) case against Tornado. “So they're going to err — it appears — on the side of potentially infringing on the privacy and free speech of law-abiding Americans. And I think that's wrong.” Emmer, who also chairs the National Republican Congressional Committee, said, “OFAC has to figure out how to get some other tools to deal with the bad actors.” Founded in 2019, Tornado Cash fell out of Treasury’s good graces after North Korean hackers allegedly used the protocol to launder hundreds of millions of dollars in stolen digital assets. This wasn’t the first time OFAC targeted mixing services, having previously identified Blender.io as a washing machine for other Russia and North Korea-backed criminal actors. But while few pushed back on the sanctions against Blender.io — a centralized entity that purportedly took custody of users’ crypto before spitting it back out — Treasury’s blacklisting of Tornado Cash targeted open-source software that its developers say they no longer control. Functionally, Tornado’s now an anonymizing perpetual motion machine: “Decentralized and unstoppable, as long as Ethereum isn’t changed or taken down,” the founders wrote in a May 2020 blog post . Tornado co-founder Roman Semenov emphasized that point as fears mounted over the use of crypto to evade sanctions – particularly following Russia’s invasion of Ukraine. “There’s not much we can do” to restrict transactions on the protocol, he told Bloomberg in March. Treasury has said that the sanctions targeting Tornado Cash, including the entities that maintain the protocol and oversaw upgrades, are no different than those that have been applied to other crypto entities over the years. DeFi proponents and crypto advocacy groups say that oversimplifies the matter, and that blacklisting code – rather than a specific business or individuals – amounts to an assault on free speech and due process. Coin Center, a crypto-focused Washington think tank, has already said it’s exploring a legal challenge on due process grounds. (Notably, as POLITICO’s Ben Schreckinger pointed out last week , there is precedent for First Amendment protections applying to the publication of cryptographic code.) To be sure, Tornado can and has been used by legitimate actors to privatize otherwise traceable transactions on Ethereum’s public ledger. The blockchain analysis firm Chainalysis reported earlier this month that roughly two-thirds of the crypto that’s been routed through the service came from centralized exchanges or DeFi platforms. But that same report noted that almost 30 percent of that volume was either stolen or sent there by groups that were eventually sanctioned. And therein lies the rub. The privacy tools that benefit normal crypto traders can also be used by criminals. Criminals took note en masse. Tornado’s decentralized code was “not a clean fit” with anti-money laundering and know-your-customer rules, said former CFTC Commissioner Dawn Stump, who was recently hired as a strategic advisor for the blockchain analytics firm Solidus Labs. “Authorities have taken — and will continue to take — a really keen interest in that AML-KYC element that makes our markets solid,” she said. “There will be more done in that space.” That said, determining how authorities move forward with enforcement actions or sanctions against ethereal pieces of software that are no longer controlled by a core group of developers is a much more difficult question. “I would be well over my skis if I pretended to know the ins and outs of what OFAC is doing there,” Stump added. IT’S WEDNESDAY — And the bars in Jackson Hole are bracing for what’s coming. Send tips, story ideas and feedback to kdavidson@politico.com, ssutton@politico.com or aweaver@politico.com.
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