Thread by @PokoFund

We are underestimating how serious OFAC #sanctions on #TornadoCash is.

Follow the thread to understand the case, how doing-nothing is troublesome, why using sanctions is tempting for large nations, and the crypto-specific aspects to watch for moving forward.

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1/ OFAC = Office of Foreign Assets Control

They enforce sanctions against high profile individuals deemed hostile to American interests. To ensure that Americans cannot legally do business with Iran, North Korea, etc without special government approval. (c/o @BowTiedIguana)

2/ Tornado Cash (TC) helps mix Ethereum users’ ETH or ERC-20 tokens with other users’ to obscure the info of the sender, recipient, and time of sending. The legitimate reason for OFAC to chase after TC is mainly the suspicion that it is linked to North Korea’s Lazarus Group.

3/ Lazarus Group is suspected of laundering hundreds of millions of dollars from notorious crypto hacks (including the Ronin bridge) to fund weapons programs.

4/ As of August 8th, all assets in TC are tainted. Tether, Circle, and BitGo will refuse to redeem these tokens. It is likely that the tokens will be withdrawn from TC anyway and dumped into liquidity pools. Liquidity providers will be left holding the bag.

5/ @geoffrey_see worked on sanctions compliance for an education non-profit operating in sanctioned countries for 10 years. Let’s first look at how financial sanctions work, their history and what the impact is on protocols and decentralized tech:

6/ Financial sanctions work through the banking system. Read Treasury’s War by Juan Zarate. Every USD on fiat rails passes through US jurisdiction. Every bank globally is concerned, OFAC might deem it at risk of AML/CFT violation and cut it off from USD transactions.

7/ The modern era of the Treasury’s War was kicked off after September 11. It’s meant to be proactive by creating risks of huge penalties for banks for actual violations AND failing to be proactive in shutting down accounts -> Banks are conservative with crypto-related companies.

8/ Financial sanctions tend to creep. Take a look at North Korea. It started with funds that directly finance institutions or individuals tied to its nuclear program.

9/ Then it moved to luxury goods and sports equipment. And then there were entire sectoral bans (e.g. art/mining/etc), and to canned coffee. Most important is there is often NO clear guidebook on what is sanctioned.

10/ What does 'NO clear guidebook' mean? Often, it’s not always clear what is prohibited and what isn’t. Each country often has its own definitions (e.g. “luxury good”).

11/ What happens is banks get frightened and decide to de-platform all accounts that are at risk! You don’t need to violate sanctions to be affected.

12/ Every large country will be tempted to use sanctions to exert power offshore. It’s a seductive tool. Early sanctions focus on what the public can agree on.

13/ Over time it is an instrument of power to go after every actor a country disagrees with. China, Russia and EU have also jumped on the sanctions bandwagon.

14/ So what are some of the crypto-specific aspects to watch for? For a start, banking relationships with web3 companies will become more strained! Fiat banking and centralized exchanges are where points of regulation occur.

15/ In sanctioning TC, OFAC is extending its reach to every USD stablecoin and bringing it under its jurisdiction just as it has with every fiat banking USD transaction (and every fiat bank that needs to use USD).

16/ Everyone can be an enabler of sanctions #violation. Financial sanctions rely on self-enforcement. If your protocol is permissionless, and your team is identifiable, someone can use your protocol to transfer value and violate sanctions. See below (c/o @0xJim)

17/ OFAC can come after you at its discretion. Circle and Tether will need to enforce US policy if they don’t want their fiat dollars to disappear. More Dapps and protocols will require some form of KYC or vetting.

18/ If you want to accept crypto payments or deal with crypto assets, you will need to de-risk it by carving it out from your main entity with a legally wrapped treasury. Banks might run from your company if they think you are mixing crypto with your banking relationship.

19/ Expect a world of unregulated crypto, regulated crypto and fiat. There will be bridges across all three. And it will be immensely more expensive, complicated and face a patchwork of country-specific regulations.

20/ Some additional and amazing takes on what sanctioning TC means for our community…
@DailyGwei_TV :

https://twitter.com/DailyGwei_TV/status/1557036071082418184

@LiquityProtocol :

https://twitter.com/LiquityProtocol/status/1557001707896414209

@mdudas :

https://twitter.com/mdudas/status/1557128599513227264?s=20&t=_7lcCu9gwVuWy4rw4ZbQiw

@jerallaire :

https://twitter.com/jerallaire/status/1557004767930499072?s=20&t=pvBjjH1DjG5oGqej-YCZHQ

@RezaJafery :

https://twitter.com/RezaJafery/status/1556751888896258049?s=20&t=2neAEaehWpLEASwg238LIA

21/ That’s it for our take on this matter. Please share this thread widely so others can start mapping out the repercussions for their personal and/or business situation.

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