Tornado Cash FAQs; White House Crypto Climate Report; SEC's Newest Crypto Unit
DEF Weekly Roundup - September 14, 2022
OFAC Clarifies Implications of Tornado Cash Sanctions
On Tuesday afternoon, the Treasury Department’s Office of Foreign Asset Control (OFAC) released “FAQs” with information about the recent addition of “Tornado Cash” to the SDN list, the “Specially Designated Nationals And Blocked Persons List.”
The FAQs didn’t answer many of the substantive questions raised by the sanctioning of open-source smart contracts. Nevertheless, the Treasury's willingness to offer additional information since the designations on August 8 is very welcome and we hope it is the first of many. Treasury stated that it:
Will adopt a favorable licensing policy in response to US persons who are seeking to withdraw assets deposited in the designated smart contracts prior to August 8 (but individuals must still apply for a license to receive OFAC’s permission to do so);
Will “will not prioritize enforcement” against US victims of “dusting” transactions, who are expected to freeze and report (initially and annually) to OFAC those assets;
Does not seek to prohibit US persons “from copying the open-source code and making it available online for others to view, as well as discussing, teaching about, or including open-source code in written publications, such as textbooks, absent additional facts.”
OFAC also provided further justification for their decision alleging that around 20% of Tornado Cash’s volume was “tied to illicit activity.” A Treasury spokesperson said in an email, “North Korea has increasingly relied on illicit activities – including cybercrime – to generate revenue for its weapons of mass destruction and ballistic missile programs.”
What does this mean?
We welcome the bit of relief these FAQs will offer US persons who received dusting transactions and those with assets deposited in the smart contracts prior to the designations. These changes are directionally right, but they don’t go far enough and don’t ameliorate the serious questions raised by the US government employing a foreign policy tool to prohibit US persons from using open-source software.
Indeed, the FAQs themselves seemingly struggle with this issue. OFAC writes that while “any transaction with Tornado Cash or its blocked property or interests in property is prohibited for U.S. persons, interacting with open-source code itself, in a way that does not involve a prohibited transaction with Tornado Cash, is not prohibited.” It’s unclear what this means, and whether, for example, using a deployed fork of the open-source software is still prohibited. We’re hopeful that the Treasury comes to view prohibiting US persons from using certain software as ill-suited to accomplishing the US’s foreign policy objectives. In the meantime, Coinbase is funding a challenge to the designation on the grounds that open-source software is not an entity and therefore not “sanctionable,” and we expect several other similar challenges will likewise seek judicial recourse as well.
White House’s Crypto Climate Report
On Monday, the Office of Science and Technology Policy (OSTP) responded to President Biden’s crypto executive order by releasing its report, “Climate and Energy Implications of Crypto-Assets in the United States.”
The paper provides answers and explanations to four core questions that the Biden Administration ordered them to explore:
(1) How do digital assets affect energy usage, including grid management and reliability, energy efficiency incentives and standards, and sources of energy supply?
“Crypto-assets use a significant amount of electricity.” “Electricity usage varies substantially with different crypto-asset technologies,” referring to the energy output difference between proof-of-work and proof-of-stake.”
(2) What is the scale of climate, energy, and environmental impacts of digital assets relative to other energy use, and what innovations and policies are needed in the underlying data to enable robust comparisons?
“Global electricity generation for the crypto-assets with the largest market capitalization resulted in about 0.3% of global annual GHG emissions.”
(3) What are the potential uses of blockchain technology that could support climate monitoring or mitigating technologies?
“There is potential for blockchain technologies to play a role in environmental markets, and distributed ledger technology could potentially enable distributed energy resource coordination, as well as broader supply chain management.”
(4) What key policy decisions, critical innovations, research and development, and assessment tools are needed to minimize or mitigate the climate, energy, and environmental implications of digital assets?
“Crypto-asset policy during the transition to clean energy should be focused on several objectives: reduce GHG emissions, avoid operations that will increase the cost of electricity to consumers, avoid operations that reduce the reliability of electric grids, and avoid negative impacts to equity, communities, and the local government.”
What does this mean?
It’s unclear, but the report doesn’t shy away from hinting at a potential moratorium on energy intensive consensus mechanisms like proof-of-work. Appropriate agencies are directed to work with one another and industry representatives to develop effective, evidence-based environmental performance standards for the responsible design of digital assets.
Should these efforts fail, it is suggested that “the Administration should explore executive actions, and Congress might consider legislation, to limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining,” referring to proof-of-work.
SEC Announces Crypto Office for Disclosures
The SEC announced last week that it will establish a new office for “cryptocurrency filings” within its Division of Corporation Finance. This branch of the agency is charged with handling public company disclosures.
The “Office of Crypto Assets” will join the other five offices under the Division of Corporate Finance, and it will be charged with “the work currently performed across the disclosure review program to review filings involving crypto assets.”
It’s unclear who will head this new office, but the Commission anticipated that the office could be in operation sometime later this fall.
What does this mean?
It’s an interesting development amid the recent push to authorize the CFTC as the primary regulator for digital assets. Chairman Gensler has not been shy sharing his belief that the vast majority of crypto assets currently available for trade are unregistered securities.
Gensler has also openly expressed his concern over regimes that would authorize the CFTC with exclusive jurisdiction, explaining that “we do not want to undermine the protections we have in our $100 trillion capital markets.” These comments came in an interview after the release of the Lummis-Gillibrand bill.
The Chair will be in front of the Senate Banking Committee Thursday for his first in-person hearing in over a year. We anticipate a lot of talk about the Commission’s treatment of digital assets and plans going forward.
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