The Office of Foreign Assets Control ("OFAC") administers and enforces economic and trade sanctions based on US foreign policy and national security goals.
In May, the U.S. government sanctioned Blender, a coin mixer, for allegedly helping North Korea launder some of the funds stolen from Axie Infinity. Tornado Cash was used by the Lazarus group for laundering funds stolen from Axie Infinity, Harmony, and Nomad this year. Tornado Cash claimed to have blocked addresses sanctioned by the U.S., even if it has been accused of not giving due diligence.
On Monday, August 8, 2022, the OFAC sanctioned Tornado Cash. This means that all the Ethereum wallet addresses (roughly totaling $437m of stablecoins, ETH, and WBTC) associated with Tornado Cash and its smart contracts were added to OFAC’s SDN List.
In the immediate term, what this means for you is that if you a) live in the US and b) have interacted with Tornado Cash in any capacity i.e. donating to the project, interacting with its smart contracts, running its software, or doing any sort of business, you can face fines of up to $10,000,000 and jail time of up to 30 years.
It is illegal for any US entity (citizen, resident, or company in the US) to engage in trade, economic transactions, or other dealings with any person, company, or country on the SDN List.
But the more worrisome aspect comes from interpretations of what exactly the term 'other dealings' are implying.
It is illegal to download any related software or go to the site. So are interactions with any of those wallets or contracts, even in a non-economic capacity. USDC, USDT, and WBTC will take steps to ensure this since all of these entities need to stay in compliance with the sanction.
What about miners and validators? Would it be a breach of the sanction if a miner processed a block that contained an address that belongs on the sanctioned list? How would that be enforced on a transaction level? Would voting for blocks containing transactions by sanctioned addresses be a breach as well?
This might sound like a bit of unnecessary fearmongering and speculation, but it is prudent to keep in mind that (between Blender and Tornado Cash) for the first time ever, the US is willing to use its highest level of economic sanctions usually reserved for foreign powers and extremely dangerous people against a privacy product in crypto. This wasn't action taken by the SEC to protect consumer/investor interests, Tornado Cash was handled as a threat to national security and interest.
