Crypto Regulatory Affairs: US Federal Court Upholds Tornado Cash Sanctions

A federal court in Texas ruled that the US Treasury Department was within its jurisdiction to sanction cryptocurrency mixer Tornado Cash.

The court ruled that the platform is an “entity” that can be sanctioned under the International Emergency Economic Powers Act (IEPA), and that its smart contracts constitute “property” subject to sanctions.

The plaintiffs in the case argued that Tornado Cash is not an “entity” under the IEEPA because it is a decentralized autonomous organization (DAO) not controlled by any single person or group. They also argued that Tornado Cash’s smart contracts do not constitute “assets” because they are not tangible assets.

However, the court rejected both of these arguments. Tornado Cash has been found to be an “entity” as it consists of its founders, developers and its DAO. The court also found that Tornado Cash’s smart contracts constitute “ownership” because they provide it with a way to control and use cryptoassets.

The court decision is a major victory for the US government in its efforts to crack down on the use of cryptocurrency for illegal activities. It makes it clear that the government can sanction cryptocurrency mixers, even if they are decentralized and have no central point of control.

It’s also a stumbling block for privacy advocates, who argue that cryptocurrency mixers are a valuable tool for protecting the privacy of financial transactions.

The US Treasury Department is proposing new tax rules for cryptocurrencies

RIN 1545-BP71 is a regulation proposed by the Internal Revenue Service (IRS) that would require cryptocurrency brokers to report gross receipts and background information for all cryptocurrency transactions to the IRS. It would also provide guidance on how to determine the realized amount and basis for digital asset transactions.

The proposed regulation has met with mixed reactions from the crypto industry. Some of them have welcomed the regulation, arguing that it will help bring cryptocurrencies into the mainstream financial system and make it easier for taxpayers to meet their tax obligations, while others argue that it is too burdensome and will stifle innovation.

The IRS is currently accepting public comments on the proposed regulation. The deadline for submitting comments is October 4, 2023.

Key points from the proposed regulation include:

• Requirement for cryptocurrency brokers to report gross income and basic information for all cryptocurrency transactions to the IRS.
• Guidance on how to determine the realized amount and basis for digital asset transactions.
• Applicability of the regulation to all cryptocurrency brokers, regardless of their size or location.

The proposed regulation represents a significant advance for the industry. It remains to be seen whether the ordinance will be finalized in its current form or modified in response to public comments.

Requests are coming to implement the UK Travel Rule

The Travel Rule – an anti-money laundering regulation that requires regulated crypto firms to collect and share information about the originator and beneficiary of cryptocurrency transfers – will come into effect on September 1 in the UK.

The country first implemented the Travel Rule in July 2022, but gave companies a grace period until September 1 to comply with the new requirements.

In order to comply with the Travel Rules, Virtual Asset Service Providers (VASPs) must collect the following information about the originator and beneficiary of the cryptocurrency transfer:

• name;
• date of birth;
• address;
• unique client identifier;
• account number; and
• transaction reference number.

The industry has expressed significant push back on the rules, with advocacy group CryptoUK noting:

• “As there is no de minimis, all transactions need to be checked against verified CDD information (so, for example, even for a £10 (or Euro equivalent) transaction).

• You must return a transaction, regardless of size/risk where there is inadequate TR information (then again, for example, even a £10 transaction).
• Dealing with the lack of global interoperability of TR solutions and legal obligations will continue to make this framework challenging.”

While there is no indication that the Financial Conduct Authority (FCA) will seek to further extend the go-live date, industry observers are hopeful that prevailing best practices will be sufficient to meet regulatory obligations as functional compliance capabilities continue to evolve.