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Updated: OFAC Issues FAQs Clarifying Sanctions Against Virtual Currency Mixer Tornado Cash
Practical Law Legal Update w-036-9229 (Approx. 6 pages)
Updated: OFAC Issues FAQs Clarifying Sanctions Against Virtual Currency Mixer Tornado Cash
by Practical Law Finance
| Published on 18 Nov 2022 • USA (National/Federal) |
The US Department of the Treasury's Office of Foreign Assets Control (OFAC) issued four new frequently asked questions (FAQs) clarifying economic sanctions imposed by OFAC against cryptocurrency mixer Tornado Cash and its website, as well as related virtual currency wallet addresses.
On September 13, 2022, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) published four new Frequently Asked Questions (FAQs) clarifying some aspects of economic sanctions that it imposed against virtual currency (VC) mixer Tornado Cash as well as related VC wallet addresses (see Legal Update, OFAC Issues Sanctions Against Virtual Currency Mixer Tornado Cash).
FAQ No. 1079 states that parties that were in the process of engaging in transactions with the mixer within US jurisdiction at the time of the sanctions may request a specific license from OFAC to engage in transactions involving the subject VC. Under this FAQ:
- US persons should be prepared to provide, at a minimum, all relevant information regarding these mixer transactions with Tornado Cash, including the
- wallet addresses for the remitter and beneficiary;
- transaction hashes;
- the date and time of the transaction(s); and
- the amount(s) of VC.
- OFAC would have a favorable licensing policy towards such applications, provided that the transaction did not involve other sanctionable conduct.
FAQ No. 1078 addresses so-called "dusting attacks," in which, following the designation of Tornado Cash by OFAC, certain US persons may have received unsolicited and nominal amounts of VC or other virtual assets from Tornado Cash. OFAC notes in this FAQ that:
- Its regulations technically would apply to these dusting-attack transactions involving US persons, since such transactions would be prohibited transactions involving Tornado Cash.
- However, if a US person has no sanctions nexus other than Tornado Cash, then OFAC would not prioritize enforcement against the delayed receipt of initial blocking reports and subsequent annual reports of blocked property from such US person.
FAQ No. 1077 clarifies that US persons cannot engage in transactions involving identified Tornado Cash VC wallet addresses absent a specific license from OFAC because:
- US persons are prohibited from engaging in transactions involving Tornado Cash, including through the VC wallet addresses that OFAC has identified.
- If US persons were to initiate or engage in any such transactions with Tornado Cash, such a transaction would violate US sanctions prohibitions, unless exempt or authorized by OFAC.
FAQ No. 1076 specifies that, while engaging in any transaction with Tornado Cash or its blocked property or interests that OFAC has identified is prohibited for US persons, including through the VC wallet addresses that OFAC has identified, OFAC notes that interacting with open-source code itself in a way that does not involve a prohibited transaction with Tornado Cash is not prohibited. In this FAQ, OFAC notes that US persons would not be prohibited by US sanctions from:
- Copying the open-source code and making it available online for others to view.
- Discussing, teaching about, or including open-source code in written publications, such as textbooks, absent additional facts.
- Visiting the internet archives for the Tornado Cash historical website.
- Visiting the Tornado Cash website if it again becomes active on the internet.
It has been observed that FAQ No. 1076 appears to be aimed at refuting claims that OFAC's Tornado Cash sanctions have infringed upon free speech rights, making clear that OFAC is sanctioning conduct not speech.
OFAC sanctioned Tornado Cash on August 8, 2022 alleging it had been used to launder more than $7 billion, including proceeds from North Korean cybercrime activity. On September 8, 2022, six users of Tornado Cash filed a lawsuit in a Texas federal court, funded by the largest US based crypto exchange Coinbase, accusing OFAC of violating their constitutional rights to free speech and overstepping their authority in sanctioning the cryptocurrency mixer instead of a person or an entity (see Legal Update, OFAC Issues Sanctions Against Virtual Currency Mixer Tornado Cash).
Update. On November 8, 2022, OFAC amended FAQ Nos. 1076, 1078, and 1079, and issued FAQ No. 1095, all related to the Tornado Cash OFAC economic sanctions.
- FAQ No. 1076 addresses the redesignation of Tornado Cash to the SDN list. OFAC simultaneously designated Tornado Cash pursuant to Executive Order 13722 (E.O. 13722), which blocks property and interests of the government of the Democratic Republic of North Korea (DPRK) and the Workers’ Party of Korea from being transferred, paid, exported, withdrawn, or otherwise dealt in, and generally prohibits US persons from engaging in transactions with these parties without authorization from OFAC, and redesignated Tornado Cash pursuant to E.O. 13694, as amended, for facilitating the laundering of proceeds of cybercrimes, including those committed by the Lazarus Group.
- FAQ No. 1078 clarifies that OFAC will not prioritize enforcement against the delayed receipt of initial blocking reports and subsequent annual reports of blocked property from US persons who may have received unsolicited and nominal amounts of VC or other virtual assets from Tornado Cash smart contracts, a practice commonly referred to as "dusting."
- FAQ No. 1079 explains how persons who sent VC to Tornado Cash can complete transactions or withdraw VC without violating US sanctions for withdrawals or transactions that did not occur before the August 8, 2022 designation.
- FAQ No. 1095 clarifies that a designated "person" under E.O. 13722 or E.O. 13694, as amended, is a partnership, association, joint venture, corporation, group, subgroup, or other organization.