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Sanctions on crypto protocols work. Really well, in fact.

That’s the conclusion from new research led by Professor John M. Griffin at the University of Texas at Austin. 

His 85-page report, shared exclusively with DL News, examined the impact of sanctions and anti-money laundering policies on the Tornado Cash crypto mixer. 

The findings are startling. 

"Following the Office of Foreign Assets Control's 2022 sanctioning of the privacy-preserving protocol for facilitating over $7 billion in illicit funds, monthly volumes on Tornado Cash decreased by 60%."

Likewise, exchanges reacted quickly too, and thwarted interactions with addresses associated with the tumbler. 

“Our findings indicate that crypto asset freezes and anti-money laundering enforcement have been costly to criminals,” conclude Griffing and his colleagues. 

But those sanctions on the protocol were lifted in March. 

Meanwhile, new clauses in the Senate Banking Committee’s market structure bill suggest that similar protocols would be excluded from traditional anti-money laundering and bank secrecy regulations. 

A developer who deploys a smart contract and has no unilateral control or ability to change the contract after its deployment would not be treated as a money transmitter, meaning they would fall outside AML and BSA requirements, according to the bill. 

Any centralised front-end or relayers — or any business built on top of the protocol — would, however, fall within scope. 

Roman Storm, co-founder of Tornado Cash, was found guilty of conspiracy to operate an unlicensed money transmitting business in August. The founders of similar service Samourai pleaded guilty to the same crime in August.

If the proposed rules had been introduced earlier, then it’s less likely that they would’ve faced the same allegations.

The new rules are worming their way through Capitol Hill too late for the Tornado Cash and Samourai developers to benefit, but experts are optimistic that these key clauses will prevent other builders from facing serious charges. 

Conversely, some critics, such as Lee Reiners, a lecturer at Duke University and a financial regulation expert, argue that such a clause will create an “illicit finance superhighway.” 

That’s because what’s stopping a developer from simply redeploying another multi-billion-dollar crypto mixing service and throwing away the admin keys? 

“There’s nothing to stop it,” Reiners told DL News. “And the draft bills have no plan for it either.” 

Others, such as Ari Redbord, global head of policy at analytics firm TRM Labs, suggest the market structure language is hardly a free pass.

“Just because protocols without unilateral control may not be deemed 'money transmitters' under market structure drafts, that does not mean they exist outside the reach of law,” he told DL News. 

“In other words: these bills should aim to protect lawful developers, not launderers.”

ICYMI

• Gary Gensler doubles down on anti-crypto rhetoric: ‘Most tokens lack fundamentals’

  Gary’s back, this time reminding the fine folks of CNBC that cryptocurrencies — excluding Bitcoin — “lack fundamentals.”

• Gemini’s Cameron Winklevoss says tokenisation will jailbreak equities — ‘groundbreaking’
  The SEC’s new deregulatory blitz has at least one Winklevoss twin waxing poetic. The co-founder of Gemini exchange called Project Crypto “groundbreaking.”

• UK’s top financial watchdog opens crypto consultation amid Trump visit and aggressive lobbying
  The Financial Conduct Authority has issued a new consultation period to help the United Kingdom to gather more information about how exactly it should regulate the crypto industry.

Story of the Week

How the SEC is about to usher in ‘a ton’ of crypto ETFs

Be it approving a Bitcoin ETF or halting legal action against a crypto company, the SEC’s growing crypto friendliness over the last two years has been palpable. But a recent suggestion from Commissioner Paul Atkins is somewhat less clear.

However, that doesn’t mean it won’t have a ripple effect far and wide for the rest of the market.

Post of the Week

Even as some lawmakers and commissioners reference the lending crisis that struck the industry in 2022, others say this rally will be different. Hunter Horsley, CEO of Bitwise Invest, says the next year will be “explosive” for lending and borrowing.

What could go wrong?

DL News is an independent news organisation that provides original, in-depth reporting on the largely misunderstood world of cryptocurrency and decentralised finance. From original stories to investigations, our journalism is accurate, honest and responsible.

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