The U.S. government’s latest initiative to combat the illegal use of cryptocurrencies by criminal elements and foreign regimes is encountering rejection within the sector, including one of its most prominent and influential players – Tether.
The Treasury Department Sanctioned Tornado Cash earlier this month after alleging that it had enabled North Korean hackers and others to launder digital assets stolen in cybercrimes. Sanctions often target specific people, nations, or businesses, and U.S. businesses abide by them by ensuring they don’t do business with the targeted parties.
The penalties imposed on Tornado Cash, however, are unusual. As a mixer, Tornado Cash hides the origin of digital assets by combining them before consumers withdraw them. Its authors wrote it so that even they cannot modify it, and it exists as software code on a decentralized, global network of computers. Leaders in the cryptocurrency sector claim they are unsure of what they need to do to remain legal.
Tether operates the largest stablecoin in the world, USDT, with a market cap of $67B at the time of publishing. This stablecoin is a cornerstone of the global cryptocurrency market and has a value pegged to the U.S. dollar. In other circumstances, investors use it as collateral when purchasing and selling other digital assets.
Tether has already drawn the attention of American regulators and law enforcement, with some claiming the company might violate new Treasury regulations. These claims are made on the basis that Tether is not blocking accounts connected to Tornado Cash, according to Dune Analytics.
In a statement, Paolo Ardoino, the chief technology officer of Tether, claimed that “Tether has not been approached by U.S. government or law enforcement with a request” to halt transactions with Tornado Cash. The company “often replies to inquiries from U.S. authorities,” he added.
Current Status of Sanctions
It is unclear whether Tether is required by law to comply with Treasury’s measures. Because it “does not operate in the United States or onboard U.S. persons as customers,” Ardoino added. The Treasury Department declined to respond when asked if Tether violates the Tornado Cash sanctions.
Experts on sanctions acknowledged that the issue is up for debate.
Scott Anderson, a former State Department adviser speaking to the Washington Post said, “the restrictions generally apply to all U.S. nationals or corporations, or any person or organization in or doing business in the United States, or any transactions touching the United States.”
Since Tether registered with the Financial Crimes Enforcement Network, a component of the department that combats money laundering, its executives claim that Treasury oversees the company.
Tether has a history of being penalized by authorities. It settled allegations from the New York Attorney General’s office in 2021 that it had lied about the make-up of the assets underpinning its stablecoin, USDT, for $18.5 million. Later that year, the company paid an additional $41 million to resolve similar allegations made by the Commodity Futures Trading Commission.
The vagueness surrounding Tether’s statement and the ensuing controversy highlights the firestorm the Treasury has unleashed in its most recent attempt to stop the unlawful exploitation of digital assets. Currently, no official action has been taken against Tether, although punitive measures may be taken shortly, pending Treasury Department decision-making.