A legal insight into whether crypto sanctions going too far? – SlateCast #23 A legal insight into whether crypto sanctions going too far? – SlateCast #23

A legal insight into whether crypto sanctions going too far? – SlateCast #23

Anand Sithian and Carlton Greene talked about the sanctions on Tornado Cash and agreed that it could have certain implications for the future of DeFi.

A legal insight into whether crypto sanctions going too far? – SlateCast #23

Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.

Partner and member of Crowell & Morning’s International Trade and White Collar & Regulatory Enforcement Groups, Carlton Greene, and Counsel in the International Trade and the White Collar & Regulatory Enforcement Groups, Anand Sithian, joined CryptoSlate to talk about the implications of the Office of Foreign Assets Control’s (OFAC) sanctions on Tornado Cash (TORN).

While agreeing that they could understand where the sanctions were coming from, both Greene and Sithian said that they implied future risks for the future of crypto and DeFi.

Reasoning with the sanctions

Both guests spent long years working for the U.S. government. Before joining Crowell & Morning, Greene spent 15 years working for the OFAC and Financial Crimes Enforcement Network (FinCEN). On the other hand, Sithian had been working for the Department of Justice and took part in one of the first prosecutions on crypto in 2013.

Given their background, both agreed that they could understand OFAC’s motivation behind the Tornado Cash sanctions.

Greene approached the topic from a policy point of view and said that a substantial portion of transactions going through Tornado Cash was being used for money laundering. Moreover, the North Korean terrorist groups allegedly laundered a large quantity of that amount. Considering all this information to be accurate, from a policy standpoint, Greene said that the sanctions were pretty sympathetic.

He stated:

“Imagine a bank where 30-40% of transactions through that bank were money laundering and involved actors like north Korea, the idea that you wouldn’t take an action against them would be…”

Sithian, on the other hand, agreed with Greene and added that OFAC designated several smart contract addresses and sanctioned them as well. Sithian said this is the real motive here, rather than banning a mixer altogether. He added:

“Mixing by itself is not unlawful. If a U.S.ย  person wants to send or receive funds through Tornado Cash, there is a liability there.”

Is there a person to blame?

Greene then continued and changed his point of view to a legal one. He explained that OFAC described Tornado Cash as an “entity” without defining the exact scope of the term. Unlike, a centralized mixing service with a legal “personhood” in the eyes of the government, Tornado Cash didn’t have a personality that the government could point to and say, “that’s Tornado Cash.”

Greene argued that the main problem raised at that point where people focused on the fact that there was no person in the traditional sense to sanction. However, he said, the U.S. government had banned similar entities that didn’t have personhood in the conventional sense, which were seen as usual until Tornado Cash.

He said:

“The part that’s truly different here is that all other kinds of non-traditional persons like Al-Qaida, or the Brother Circle [that were sanctioned] didn’t provide services that lots of people used on a daily basis.”

The future of DeFi looks different now

While understanding the motives behind the sanctions, both Greene and Sithian agreed that the sanctions on Tornado Cash indicate that DeFi would have to deal with the centralized authorities much more in the future.

Sithian mentioned that the tension between DeFi and the government would remain solid. Even if the DeFi protocols are genuinely decentralized, this tension will still endanger the concept of digital assets being sensorless, permissionless, and trustless.

Greene also agreed and added:

“One of the clear messages that comes out of this is, OFAC is not going to allow somebody to evade sanctions controls by characterizing a service as decentralized.”

Greene continued that even if they can’t hold a centralized entity responsible, they’ll still use other tools to take action against decentralized entities.