Coin Center Questions Tornado Cash Indictments in Light of FinCEN Guidance

Two former developers of Tornado Cash, Roman Storm and Roman Semenov, have been indicted on charges including conspiracy to operate an unlicensed money-transmitting business. The indictment, issued by the United States Office of Foreign Asset Control (OFAC) on August 23, has raised questions in the crypto community, particularly regarding its alignment with existing Financial Crimes Enforcement Network (FinCEN) guidance.

Coin Center, a crypto advocacy group, has expressed concerns over the indictment, suggesting that the charges may not align with the definitions and guidelines provided by FinCEN. Peter Van Valkenburgh, Coin Center’s research director, highlighted that the indictment’s primary claim against the defendants is that they “engaged in the business of transferring funds on behalf of the public” without registering with FinCEN.

However, Valkenburgh points to the 2019 FinCEN Virtual Currency Guidance which states, “An anonymizing software provider is not a money transmitter.” This guidance further elaborates that those who use such software for their transactions could be considered either users or money transmitters, depending on the transaction’s purpose. Valkenburgh argues that while Tornado Cash’s tools might have facilitated users in transmitting money using the protocol’s smart contracts, this does not necessarily categorize the developers as money transmitters.

The indictment also alleges that Storm and Semenov had “complete control” over Tornado Cash’s smart contracts. Addressing this, Valkenburgh emphasized the variable nature of Ethereum smart contracts, where control can range from none to total. He stated that the degree of control is a crucial factor in determining if one is involved in money transmission. The indictment, according to Valkenburgh, does not provide clear details on the nature of the defendants’ control over the smart contracts.

Furthermore, the OFAC indictment suggests that by transferring funds on behalf of the public, Storm and Semenov were operating an unlicensed money transmission service and should have registered with FinCEN. On August 23, Semenov was added to OFAC’s list of Specially Designated Nationals and Blocked Persons, while Storm was arrested in Washington state.

This case has broader implications for the crypto community. Valkenburgh believes that the outcome could significantly influence the legal rights of U.S. citizens to develop and publish software in the future.

In related news, another Tornado Cash founder, Alexey Pertsev, was detained by Dutch authorities in August 2022 and subsequently released in late April.

Image source: Shutterstock


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The Number of Crypto-Related Enforcement Actions in the United States Grows

According to a study that was just recently released by Solidus Labs, a company that specialises in blockchain risk monitoring, the number of enforcement actions in the United States that were associated to cryptocurrencies had a significant increase in 2022. This was reported by the company in a study that was just recently published. The data shown here was collected from a poll that was carried out in the year 2022. It has been alleged that the corporation notified them of this. The findings of the investigation made this point quite clear. Both state and federal agencies are now in the process of establishing new standards and guidelines for themselves to use as points of reference for the way in which they carry out their respective law enforcement responsibilities.

In the year 2022, each of the four primary federal agencies in the United States that were active in crypto enforcement carried out 58 distinct actions. These actions were taken in response to various cryptographic crimes. These measures included things like warnings, arrests, and property confiscation. A total of 2,048 unique crypto criminals were hunted down as a result of these security measures. This number increased by a staggering 65 percent when compared to the previous record high of 38 activities, which was witnessed in 2021. In addition to this, it eclipsed the previous record high, which had been held by the number of activities recorded in the year 2020, which was 40. This new record broke the old record. In addition, this number is higher than the previous record high of 38 acts, which was accomplished in the year 2021.

The agencies, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), and the Office of Foreign Assets Control (OFAC), all broke their previous records, with the exception of the Financial Crimes Enforcement Network (FinCEN), which only took one action in 2022, compared to four actions in other years since 2013, when it was the only agency that took action. Other than that, the agencies all broke their previous records.


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Binance linked to illegal cryptocurrency platform Bitzlato, FinC

The United States Financial Crimes Enforcement Network (FinCEN), which is a division of the Department of the Treasury, has asserted that there is a connection between Binance and the unlawful cryptocurrency site Bitzlato.

In an order that was made public on the 18th of January, FinCEN noted that the cryptocurrency exchange known as Binance was among the “top three receiving counterparties” of Bitzlato when it came to the transactions involving Bitcoin (BTC).

Binance was reportedly one of the largest counterparties that received Bitcoin from Bitzlato between May 2018 and September 2022, as stated by the regulator.

FinCEN observed that other counterparties included the darknet market Hydra, which had connections to Russia, and the suspected Ponzi scam operating in Russia under the name “Finiko.”

However, FinCEN did not include Binance in their list of the top three sending counterparties in the order.

According to the paper, the three companies Hydra, the Finland-based exchange LocalBitcoins, and Finiko were the most significant contributors of Bitcoin to Bitzlato between May 2018 and September 2022. According to what FinCEN said in the order, about two thirds of Bitzlato’s top receiving and sending counterparties are linked with darknet marketplaces or frauds.

The agency said that between 2019 and 2021, Bitzlato collected cryptocurrency worth a total of $406 million via frauds, $224 million from darknet marketplaces, and $9 million from ransomware perpetrators.

The disclosure comes at a time when many agencies in the United States have begun serious enforcement action against Bitzlato. These authorities accuse the company of engaging in money laundering and allegedly enabling the circumvention of sanctions against Russia.

Anatoly Legkodymov, the creator of Bitzlato, was taken into custody by the Federal Bureau of Investigation on January 17 in Miami as part of the ongoing investigation into the company.

Bitzlato was a cryptocurrency service that wasn’t very well recognised, in contrast to prominent cryptocurrency exchanges like Binance and Coinbase.

The platform is said to have been established in 2016, and it had an office in the Federation Tower skyscraper in Moscow, where it processed transactions of at least one hundred thousand dollars.

The fact that Binance was allegedly involved in the Bitzlato case gives rise to certain worries about the activities of the exchange as well as possible relations with Russia.

As was previously reported, Binance was one of the exchanges that made the decision to keep serving non-sanctioned Russians after the adoption of the eighth sanctions package by the European Union against the nation.


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US Treasury Fines Bittrex Exchange $29m for Multi-Year Sanctions Violation

Washington-based cryptocurrency trading platform, Bittrex Has been fined the sum of $29 million by the United States Treasury Department through the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN). 


The fone, tagged as the single largest levied by the OFAC on a digital currency trading platform, became necessary, considering Bittrex failed to implement adequate compliance programs, thus helping some of its users to evade established sanctions. 

According to the OFAC announcement, the trading platform “failed to prevent persons apparently located in the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria from using its platform to engage in approximately $263,451,600.13 worth of virtual currency-related transactions between March 2014 and December 2017.”

The regulator noted that preventing these banned users would have been easy if the exchange prevented their registration based on their IP addresses at the point of registration. The FinCEN violation involved failure on the part of the trading platform to institute appropriate Anti-Money Laundering (AML) measures, thus creating a weak channel for the laundering of illicit financial proceeds.

“When virtual currency firms fail to implement effective sanctions compliance controls, including screening customers located in sanctioned jurisdictions, they can become a vehicle for illicit actors that threaten U.S national security,” said OFAC Director Andrea Gacki. “Virtual currency exchanges operating worldwide should understand both who—and where—their customers are. OFAC will continue to hold accountable firms, in the virtual currency industry and elsewhere, whose failure to implement appropriate controls leads to sanctions violations.”

The US Treasury has been more alive towards cryptocurrency service providers all year long, first coming into the limelight in May when it banned crypto mixer, and subsequently when it added Tornado Cash to its list. 

While the industry made no fuss about the Blender ban, that of Tornado Cash has been received with so many objections, all of which have spurred industry giants like Coinbase Global Inc to fund targeted lawsuits and advocacy stunts.

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Averted a year ago, controversial transaction monitoring rule is back on Treasury’s radar

As the Department of the Treasury has announced its regulatory agenda for the fiscal year earlier today, many in the web3 space have likely experienced flashbacks to December 2020, when the agency had first proposed to impose know your customer, or KYC, rules on transactions that involve self-custodied crypto wallets.

The Treasury’s semiannual agenda and regulatory plan, a document that is meant to inform the public of the department’s ongoing rulemaking activities includes and encourage public feedback, features a clause entitled “Requirements for certain transactions involving convertible virtual currency or digital assets.”

Ascribed to the Treasury’s Financial Crimes Enforcement Network, or FinCEN, it proposes to require banks and money service businesses to “submit reports, keep records, and verify the identity of customers” in relation to transactions with funds held in unhosted wallets.

In FinCEN parlance, unhosted (also known as self-hosted) wallets are those that are not controlled by an intermediary financial institution or service. Users of such wallets “interact with a virtual currency system directly and have independent control over the transmission of the value.”

The rule proposed in Dec. 2020 would have required registered cryptocurrency exchanges to collect personal details of their customers transacting with an unhosted wallet if the value of the transaction exceeded $3,000. A person sending funds from an exchange account to their private wallet would fall within the scope of the rule.

Introduced in the waning days of Secretary Steven Mnuchin’s office, the rule was scrapped amid massive pushback from the industry.

At the time, Mnuchin said that the rule addressed “substantial national security concerns” associated with the cryptocurrency market. The resurgence of the agency’s focus on self-hosted wallets measure could have to do with the “crypto as a national security threat” focus of the executive order that the Biden administration is reportedly preparing.

Still, mentioning a rule on the Treasury’s semiannual agenda does not mean that it will necessarily be adopted.