15 Comments

Highly recommend that everyone read, “Treasury’s War” to familiarize themselves as to both the methods and scope of power that OFAC wields on behalf of the Treasury Department.

Every wire, sender, recipient, and memo crosses their desk. If something is deemed as “suspicious” funds are frozen until they are satisfied. OFAC can send a litany of demands over before funds will be released

We once had a payoff wire seized for 48 hours because the borrower had a common Hispanic name and another person by the same name was on a red flag list.

The Treasury Department has spent years weaponizing OFAC. Ask anyone in banking

I cannot stress this enough. Do Not F Around.

It’ll be very “interesting” to see continued tightening around sacrifice projects like <redacted> where main contributors have historically been a big fan of Tornado Cash

Expand full comment

Thanks for the color, agrees with what I had heard too.

Did you notice this reference to North Korea less than two weeks ago?

https://twitter.com/BowTiedIguana/status/1556727824580595713

Expand full comment

I missed It but not at all surprised that you’re on top of it.

I think a lot of people just think, “oh, that doesn’t affect me.” Or “it’s not that big of a deal.

Its not that big of a deal until they do a legit transaction but then can’t use funds because some third party refuses to do biz with them “just to be on the safe side”.

they find out that their newly acquired assets are in the cold due to chain of custody passing through someone treasury is hinting might get a 311 action on.

It’s important people take what y’all say seriously. There can be dire consequences if they don’t.

Expand full comment

Obviously the entire point of decentralized crypto is to remove a central authority's ability to block/suspend/prohibit transactions. As a result some small percentage of crypto will always be used for illicit purposes (just like a small percentage of cash is used for illicit purposes)

What is to stop OFAC from adding BTC or ETH or any other coin to the sanction list based on the same logic in the Treasury's press release, namely that these coins "failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks"?

Expand full comment

A blanket ban might damage "innovation" and "the economy" and would be hard enough to enforce that it may break the public's perception that they have a realistic chance of being prosecuted for breaking laws.

I can't see a motive for them to block BTC or ETH at this point, they can track everything.

Expand full comment

Wow! Massive update - thanks for sharing this!

Expand full comment

is there a way for eth miners to auto reject those transactions on the list? would ethereum devs want to add that ability?

Expand full comment

Speculation: Ethereum client software might be updated with an opt-in patch allowing miners/validators to ignore tainted mempool transactions to avoid breaching sanctions. Transaction censorship isn't popular but we could see this being done in house by large US miners / stakers.

Expand full comment

Yes, that is a possibility. Voluntary self-censorship of transactions could easily be added to any of the clients (proof of work). Whether by the Ethereum foundation, the maintainer of the clients, or in-house by a mining company.

Under PoS, it's a little more complicated but self-censorship should be both possible, and very bad for Ethereum.

Expand full comment

Thanks for the update! The logic for blocking makes sense but there seems to be a lot of potential collateral damage for people in the crypto market who are unaware of the risk.

This may be too technical - but if US-based miners/validators restrict or ignore certain addresses, would that lead to different blocks of data for US and non-US entities (is that even possible)? Or would the underlying transaction data be the same and the US-entities would not recognize part of the block.

Separately, in a proof of stake system, if the majority of a chain's activity is non-US based and held by non-US persons that don't abide by the sanctions, could that impact an entire project for US participants?

Expand full comment

For PoW the miners would just elect not to try and build a block from mempool transactions which interacted with blacklisted addresses. So your tx would sit in mempool until an unmodified/non-US client included it in a block. Seems innocuous at first but...

Expand full comment

Protocols blocking sanctioned addresses from front ends wouldn't even do anything to prevent legal risk no?

Expand full comment

Might make the authorities a little more lenient on them or a court / jury more sympathetic, but the 'problem' is that anyone can permissionlessly interact with the contracts on chain without a frontend.

Bigger picture I think the authorities want people to only use 'trusted' operating systems which only install apps from 'walled garden' app stores (choke point for removing 'illegal') content. Following the logic eventually possessing software tools which can be used to write to the blockchain will be suspicious and anyone who can't use the official frontend just can't use a blockchain app because of lack of technical knowledge and tools.

Richard Stallman guessed 20 years ago that the gov might require a licence for access to a debugger. Maybe blockchain tools will be classified as munitions (as strong encryption was in the 90s) so you can't export them, and it might become illegal to possess them without some sort of licence (which big tech employees can get easily but independents need to jump through too many hoops to prove they're not a threat to the state).

Stallman's essay still worth reading. https://www.gnu.org/philosophy/right-to-read.en.html

Expand full comment
Comment deleted
Aug 8, 2022
Comment deleted
Expand full comment

We covered REN protocol https://defieducation.substack.com/p/ren-overview-moving-crypto-between

Wouldn't say WBTC is at risk per se. Only ~$6m is in Tornado Cash. Anyone legitimate can probably apply for an OFAC exemption to allow BitGo to redeem their WBTC. It's just paperwork / hassle / costs / delays.

I personally stick to Ethereum native assets and have exposure to BTC through spot and derivatives rather than bridging BTC to Ethereum.

Expand full comment