The Crypto Enthusiast And Regulator: What OFAC Is, Could Be, And Should Do To Regulate Cryptocurrencies | Sheppard Mullin Richter & Hampton Srl – Tech Tribune France

On May 6, the US Treasury Department’s Office of Foreign Assets Control (OFAC) designated a cryptocurrency mixer, Blender.io, as a Specially Designated National (SDN). This sanction follows a series of executions and sanctions which we have already discussed here and here.

The action is the latest in a fascinating back-and-forth between the crypto industry and its regulators, as both sides explore a new world of currency movement and what controls can and should be placed there. To illustrate the positions of the parties, we offer the following discussion between a crypto-enthusiastic blockchain lawyer (played by our partner, Gabriel Khoury) and a skeptical regulatory lawyer (played by our partner, Reid Whitten).

Please note that we are not seeking to resolve what is certain to be an ongoing debate, we are simply setting the scene for the discussion by elucidating certain points of view of the various stakeholders. We are, (to borrow an awfully banal phrase), “starting the conversation”.

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Keen: First, some information about Blender, which is a cryptocurrency “blender”. Mixers hide the identity of your crypto and reduce the chances of your crypto being tracked by third-party tracking software. A cryptocurrency mixer is mostly used for legitimate reasons.

Skeptical: whoah whoah whoah! Objection. That’s a pretty speculative characterization. Do not hesitate and name the legitimate reasons for a blender strength be used, but let’s take it easy on editorialization so soon.

Keen: Ok, just the facts then. Many centralized cryptocurrency exchanges track all transactions, which can easily expose a user to illicit actors, people who can spy on or steal your data. Using a blender, you can hide your hidden crypto transactions from these illicit actors. . .

Yes, and, as I see you are trying to point out, they can also be used to hide transactions from intrusive governments.

Skeptical: Hmm.

Keen: All right, governments, intrusive or otherwise.

With Bitcoin, for example, if a user, we will call it User A, sends a Bitcoin to User B, this transaction is recorded and visible on this blockchain. Mixers are software applications that mix User A’s crypto payment with other users’ crypto and send a mixture of crypto to one or more addresses designated by User A. This mixing process breaks the chain link between wallet addresses, which improves user privacy and autonomy. Thus, the fact that User A sent Bitcoin to User B is not easily discernible from this blockchain record.

Skeptical: Alright, so one user, user A, puts in his Bitcoins or Dogecoins or whatever, the mixer flips them with the Bitcoins and Dogecoins and Ethereum and Tether of a bunch of other users, then gives back to user A ( or to the user B) a equivalent value of the resulting mixture of parts. User A and User B do not know the source of their new coin assortment, just that it has the equivalent value of what was put in (less, presumably, a fee for the mixing service). Is it correct?

Keen: It’s true. These days, blockchain analytics companies can quite easily track who owns which crypto wallet. Thus, these cryptocurrency mixers revive the original libertarian crypto ideals of privacy, autonomy, and decentralization that were originally promised by the Bitcoin white paper.

Skeptical: Ok, but the mixer is expressly designed to hide where the funds are coming from! It’s not far from a literal washing machine in that it can mix and clean illicit funds, mask them, and make them untrackable (ok, it’s still a figurative washing machine, but you see the idea).

One can simply imagine user A saying to the authorities: “What, me? Hold the proceeds of a crime? Why not at all! It was only the random assortment of parts that came out of the blender! They could not be attributed to a crime.

Keen: Maybe, but let’s see bigger than that. There are actually at least four reasons why someone would use a mixer to: (1) secure their crypto by hiding the source of transactions in an otherwise open network; (2) prevent hacks by hiding the movement of their crypto; (3) protect their identity; and (4) avoid government regulation by keeping their trading volume private.

Skeptical: Hmmm, the latter could also be called “tax evasion”.

Keen: Maybe, and I will also concede that money laundering should probably be on this list as the fifth possible use of a blender. However, OFAC makes it clear that most virtual currency activity is legal and most illicit use is prevented by implementing appropriate Anti-Money Laundering and Anti-Terrorist Financing (AML/CFT) controls. ) and sanctions to prevent sanctioned persons and other illicit actors from mining virtual currency to undermine U.S. foreign policy and national security interests. It should also be noted that some private crypto mixers meet the legal requirements of the Bank Secrecy Act.

Skeptical: Interesting, but I would like to note that last year a bitcoin mixer operator pleaded guilty to a $300 million money laundering conspiracy, a Russian-Swedish national was arrested for allegedly laundering $335 million dollars in cryptocurrency through a mixer and a hacker stole over $33 million from a major Crypto exchange and then allegedly washed the currency through a cryptocurrency mixer. And these examples are just the ones the federal government has spotted!

Keen: . . . and you might consider these examples could be considered great for the crypto industry! Think about it, market players don’t want illicit players stealing their hard-earned money, and mixers help keep these illicit players away by hiding and protecting participants’ funds. The more illicit actors are caught using mixers, the more legitimate mixers can become as they filter out bad actors.

Skeptical: It’s an interesting point of view, but it seems like mixers would have a long way to go before I could see them as much beyond a hindrance to law enforcement. I mean, the good part of the blockchain – from a regulator’s perspective – is that once they find the “bad actor”, they can trace the transactions from the actor’s wallet across the network. immutable blockchain record. If the bad actor takes money out of North Korea in crypto, and the FBI can connect that actor to the wallet that took the money out of a sanctioned country, then there is a permanent and unchanging public track of where that money is going!

And I don’t want to pick on cryptocurrency mixers. Mixers aren’t the only way criminals use crypto to evade law enforcement. There are also privacy-focused tokens that (apparently) offer full separation between the wallet address and the identity of the holder.

Perhaps we can agree that there are many considerations here, many things to regulate, but probably also some deference to the benefits of a successful, essentially anonymous means of conducting transactions.

Keen: I agree on all points. Criminals trying to evade law enforcement will happen whether or not crypto mixers exist. I would argue that crypto transactions are generally safer than shady cash transactions because blockchain allows for a literal public ledger. Handing over cash in a briefcase without witnesses makes it virtually impossible to track the funds.[1] At least with blockchain technology, some record is kept.

Conclusion

Cryptocurrency market participants should pay attention to the regulatory space in the coming weeks and months. Following President Biden’s Executive Order on Cryptocurrency, the application of crypto by states and the federal government has grown at a faster rate than ever. This indicates that these agencies are preparing for a regulatory storm over the coming year. Stay tuned for updates as we continue the conversation here.[2]

FOOTNOTES

[1] Please note that this is absolutely not legal advice, or really any kind of life advice. Please do not deliver or accept briefcases filled with cash based on a statement in this article.

[2] *Sigh* We’re sorry, we promise to find more original terminology.

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The Crypto Enthusiast And Regulator: What OFAC Is, Could Be, And Should Do To Regulate Cryptocurrencies | Sheppard Mullin Richter & Hampton Srl – Tech Tribune France


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