Tether prepared to defy controversial U.S. sanctions on Tornado Cash

The Treasury Department’s Office of Foreign Assets Control (OFAC) stirred controversy earlier this month when it sanctioned Tornado Cash, an Ethereum-based virtual currency mixer, over allegations the platform “failed to impose effective controls” to stop the laundering of proceeds from cybercrime. The designation has drawn criticism from industry stakeholders in addition to politicians, with Rep. Tom Emmer (R-Minn.) sending a letter to Treasury Secretary Janet Yellen on Tuesday demanding clarity on the move.

“OFAC has a long, commendable history of utilizing financial sanctions to enhance the national security of the United States,” Emmer wrote in the letter, which he shared on Twitter. “Nonetheless, the sanctioning of a neutral, open-source, decentralized technology presents a series of new questions, which impact not only our national security but the right to privacy of every American citizen.”

Tether, a stablecoin issuer incorporated under several names in the British Virgin Islands and Hong Kong, shared its concerns in a news release Wednesday. Though the company says it does not operate in the United States, it abides by OFAC sanctions as part of its compliance efforts.

“OFAC has not indicated that a stablecoin issuer is expected to freeze secondary market addresses that are published on OFAC’s [Specially Designated Nationals] List or that are operated by persons and entities that have been sanctioned by OFAC,” Tether stated. “Further, no U.S. law enforcement agency or regulator has made such a request despite our near daily contact with U.S. law enforcement whose requests always provide precise details.

“Unilaterally freezing secondary market addresses could be a highly disruptive and reckless move by Tether.”

Virtual currency mixers are designed to increase privacy by mixing different streams of cryptocurrencies before transmitting them to their individual recipients. They have received increased scrutiny from U.S. regulators, who contend mixers are commonly used by illicit actors for laundering activities.

In May, the Treasury Department announced first-of-their-kind sanctions against virtual currency mixer Blender.io for its alleged role in a significant virtual currency heist carried out by the Lazarus Group, a North Korean state-sponsored cyber hacking group. OFAC similarly cited the illicit activities of the Lazarus Group in its sanctioning of Tornado Cash.

As a result of the designation, all transactions by U.S. persons or within the United States that involve property or interests in property of Tornado Cash are prohibited unless authorized by a general or specific license issued by OFAC.

While some crypto platforms, like Tether, are holding out on complying with the Tornado Cash sanctions, Circle, the issuer of the USD Coin (USDC) stablecoin, announced it would freeze accounts in accordance with the designation.

“We believe that, if made without instructions from U.S. authorities, the move by USDC to blacklist Tornado Cash smart contracts was premature and might have jeopardized the work of other regulators and law enforcement agencies around the world,” said Tether.