District Court Upholds Tornado Cash Sanctions, DOJ Charges Founders
By Joanna F. Wasick
On August 17, a Texas federal court found that Tornado Cash, a crypto mixer (which obscures the source of crypto transactions) is an entity that can be sanctioned. Tornado Cash is a mixer that operates as a decentralized autonomous organization (DAO) based on smart contracts deployed to the Ethereum network and a governance token, “TORN.” Last year, the U.S. Treasury Department (Department) sanctioned Tornado Cash for facilitating money laundering conducted by North Korean hackers. Tornado Cash then sued the Department, alleging, among other things, that it was not an “entity” subject to the Department’s jurisdiction, but was instead a decentralized, open-source software project. As such, the argument continued, the Department’s actions exceeded its authority and violated constitutional free speech and due process protections. The court disagreed, finding that Tornado Cash was an entity (composed of its founders, developers and DAO) subject to applicable U.S. law, and that the Department’s sanctioning did not run afoul of the U.S. Constitution. The decision is the first time a federal court has addressed the designation of crypto mixers.
On August 23, the Department announced that its Office of Foreign Assets Control (OFAC) had sanctioned Roman Semenov, one of three Tornado Cash co-founders, for his role in providing material support to Tornado Cash and to the Lazarus Group, a North Korean hacker group that used the mixing service. According to the Department’s press release, Semenov, a Russian citizen, was alerted that Tornado Cash was being used to launder large volumes of stolen virtual currency for the Lazarus Group. Nevertheless, he allegedly continued to pay for infrastructure supporting the Tornado Cash service and took steps to increase the anonymity of the Tornado Cash service without addressing the known illicit activity. As a result of the Department’s action, Semonov has been added to OFAC’s Specially Designated Nationals and Blocked Persons List, and accordingly all of Semenov’s property in the U.S. must be blocked and reported to OFAC, and transacting with Semenov is forbidden.
In a parallel action, the U.S. Department of Justice (DOJ) announced the unsealing of an indictment charging Semenov and Roman Storm, another Tornado Cash founder, “with conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money transmitting business.” According to a DOJ press release, “The charges in the Indictment arise from the defendants’ alleged creation, operation, and promotion of Tornado Cash, a cryptocurrency mixer that facilitated more than $1 billion in money laundering transactions and laundered hundreds of millions of dollars for the Lazarus Group, the sanctioned North Korean cybercrime organization.” The press release further notes that Semenov and Storm knew that Tornado Cash was being used for money laundering and sanctions violations and yet “refused to implement any controls and continued to operate the Tornado Cash service.”
For more information, please refer to the following links:
Multiple Financial Firms Announce New Crypto Product Updates and Offerings
By Robert A. Musiala Jr.
According to a recent press release, a major U.S. financial services firm “is convening a group of leading blockchain technology and payment service providers to join its new CBDC Partner Program.” The press release notes that the goals of the program include “bring[ing] greater understanding of the benefits and limitations” of central bank digital currencies (CBDCs) and “implement[ing] them in a way that is safe, seamless and useful.” The inaugural set of partners for the program includes several well-established companies in the blockchain and digital assets space.
A recent blog post by a major U.S. cryptocurrency exchange provided several updates on the USDC stablecoin. Among other things, the blog post notes that the U.S. exchange will make an equity investment in Circle, the issuer of USDC, and that Circle will “take full control over USDC issuance and governance.” The Centre Consortium, which has acted as a self-governance consortium for USDC, will dissolve. The blog post also notes that USDC will soon launch on six new blockchain networks.
According to recent reports, Custodia Bank announced that it has received approval from its functional bank regulator to begin accepting U.S. dollar deposits. The bank is also reportedly awaiting final approval to begin offering bitcoin custody services for customers in some U.S. states.
In a final notable development, according to a press release, a major multinational e-commerce platform has integrated with “Solana Pay, a decentralized, open-source, peer-to-peer payments protocol built on Solana by Solana Labs.” The press release notes that the integration will allow consumers to pay merchants on the e-commerce platform using “USD stablecoins compatible with Solana.”
For more information, please refer to the following links:
Bitcoin ETF Listed in Europe, DeFi Solutions Launch, BTC Price Data Published
By Robert A. Musiala Jr.
According to a press release, Jacobi Asset Management recently listed the Jacobi FT Wilshire Bitcoin ETF, Europe’s first spot bitcoin exchange traded fund (ETF) to be listed on the Amsterdam stock exchange, Euronext Amsterdam. According to the press release, the ETF will be regulated by the Guernsey Financial Services Commission, with custodial services provided by a major U.S. cryptocurrency custody firm. The press release also notes that “Jacobi has implemented a verifiable built-in Renewable Energy Certificate (REC) solution which allows institutional investors to access the benefits of Bitcoin whilst also meeting ESG goals.”
A recent press release by LeverFi, a decentralized finance (DeFi) startup, announced that LeverFi is working with a major U.S. technology firm “to launch and develop A.I. decentralized finance solutions that reduce user complexity and monitor on-chain portfolios” using the technology firm’s “OpenAI Service, which is the market leading service for rapid machine learning and large data analytics.” According to the press release, among other initiatives, LeverFi is launching “Morpheus … an A.I. portfolio management assistant who helps existing and new users navigate the highly complex and fragmented DeFi landscape by providing valuable portfolio management insights and live on-chain monitoring through intuitive machine learning that detects and responds to market anomalies.”
A recent report highlighted new research indicating that bitcoin (BTC) and ether (ETH) price volatility “has taken a sharp decline due to several factors ranging from government policies to wider macroeconomic factors.” According to the report, “Bitcoin’s 90-day volatility index stands at 35% while Ethereum is slightly higher at 37%.” By way of comparison, the report notes that during the same period the global oil price 90-day volatility index was 41%.
For more information, please refer to the following links:
Treasury Dept. and IRS Publish Proposed Rules for Broker Digital Asset Sales
By Nicholas C. Mowbray
On August 25, the U.S. Department of the Treasury and the U.S. Internal Revenue Service published proposed regulations regarding information reporting for digital asset sales and exchanges. The Infrastructure Investment and Jobs Act, which was enacted in 2021, clarified and expanded the current broker reporting rules to include brokers of digital assets by including digital assets in the definition of specified securities. According to a press release, “The proposed regulations would clarify and adjust the rules regarding the tax reporting of information by brokers, so that brokers for digital assets are subject to the same information reporting rules as brokers for securities and other financial instruments.” Among other things, the press release notes that the proposed rules “require brokers to provide a new Form 1099-DA to help taxpayers determine if they owe taxes, and would help taxpayers avoid having to make complicated calculations or pay digital asset tax preparation services in order to file their tax returns.” Taxpayers have the ability to submit comments in response to the proposed regulations. Comments are due 60 days after the regulations are published in the Federal Register, and a public hearing will be held on November 7.
For more information, please refer to the following links:
Singapore MAS Finalizes Stablecoin Regulatory Framework
By Robert A. Musiala Jr.
A recent press release by the Monetary Authority of Singapore (MAS) announced a new regulatory framework for stablecoins regulated in Singapore. According to the press release, the MAS “stablecoin regulatory framework will apply to single-currency stablecoins (SCS) pegged to the Singapore Dollar or any G10 currency, that are issued in Singapore.” Issuers of SCS will be required to fulfill key requirements related to the following four categories:
- Value stability: SCS reserve assets will be subject to requirements relating to their composition, valuation, custody and audit.
- Capital: Issuers must maintain minimum base capital and liquid assets to reduce the risk of insolvency and enable an orderly wind-down of business if necessary.
- Redemption at par: Issuers must return the par value of SCS to holders within five business days from a redemption request.
- Disclosure: Issuers must provide appropriate disclosures to users, including information on the SCS’ value stabilizing mechanism, rights of SCS holders and the audit results of reserve assets.
According to the press release, “Only stablecoin issuers that fulfil all requirements under the framework can apply to MAS for their stablecoins to be recognised and labelled as ‘MAS-regulated stablecoins,’” and “[a]ny person that misrepresents a token as an ‘MAS-regulated stablecoin’ may be subject to penalties.”
For more information, please refer to the following link:
Enforcement Action Targets Bank That Worked on Stablecoin Absent Approval
By Keith R. Murphy
According to recent reports and a consensual cease and desist order, the board of the U.S. central bank (Board) announced an enforcement action against Farmington State Bank, located in Washington state, as well as its holding company, FBH Corporation. The Board reportedly previously approved Farmington’s application to become a bank holding company, but did so with restrictions on the bank itself as well as on its main shareholder. The restrictions precluded the bank from altering its business plan and taking other actions absent approval. In 2022, the bank purportedly violated those restrictions by working with a third party on information technology infrastructure in connection with a public stablecoin. According to the cease and desist order, the bank’s alleged violations included “entering into a non-binding memorandum of understanding with a third party whereby the [b]ank committed to ‘work with’ the third party ‘to design the necessary IT infrastructure’ to facilitate the third party’s issuance of stablecoins to the public in exchange for receipt of 50 percent of mint and burn fees on certain stablecoins, and took material steps to implement that memorandum of understanding.” As a result of the enforcement action, the bank has indicated that it will wind down its operations and sell its assets to the Bank of Eastern Oregon, according to reports.
For more information, please refer to the following links:
Heists, Hacks and Exploitative Harms – Cryptocurrency Threats Continue
By Lauren Bass
The FBI recently identified six unhosted bitcoin wallets that hold approximately $40 million worth of bitcoin reportedly stolen by TraderTraitor-affiliated actors linked to the Democratic People’s Republic of Korea (DPRK). According to a press release, the funds were taken during several high-profile international cryptocurrency heists earlier this summer.
These figures track with a recently released report from a leading digital asset compliance and risk management company, which attributes the theft of over $2 billion worth of cryptocurrency to DPRK over the past five years and almost $200 million in 2023 alone. According to this report, DPRK been highly successful not only in stealing cryptocurrency funds but also in laundering the proceeds.
Relatedly, earlier this month, decentralized credit market Exactly Protocol, which operates on the Optimism network, reportedly suffered a $12 million bridge exploit. According to reports, the hacker exploited a contract on Ethereum, transferred deposits to Optimism and then bridged the stolen funds back to Ethereum.
In similar news, decentralized exchange RocketSwap was reportedly hacked to the tune of 471 ETH worth approximately $866,000. According to reports, the exploit occurred due to a “private key compromise” from online servers.
For more information, please refer to the following links:
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