Casey Wagner

<div id="highlights-block_62b60ba3b6dcd" class="highlights">
 <ul>
 <li>Congress subcommittee on commodity exchanges, energy and credit met this week to discuss the future of crypto regulation</li>
 <li>Disclosure requirements should consider investor knowledge of blockchain technology, one witness said</li>
 </ul>
 
</div>



In the latest instance of US lawmakers parsing the future of digital asset regulation, a House subcommittee on Friday questioned whether crypto’s disclosures are adequate enough to protect investors.&nbsp;



The House Agriculture Committee Subcommittee on Commodity Exchanges, Energy and Credit heard from industry players that crypto’s inherent transparency — all transactions are publicly and forever recorded on the blockchain — is a boon to both risk management and security.&nbsp;



“The transparency of blockchains enhances the ability of policymakers and government agencies to detect, disrupt and, ultimately, deter illicit activity in cryptocurrency markets,” Jonathan Levin, Chainalysis co-founder and chief strategy officer, wrote in his prepared testimony.&nbsp;



Blockchains may be transparent by nature, but they are also inherently hard to comprehend, Georgetown University Law Center Professor Christopher Brummer said. Investor protection should be a top priority, and making disclosures easier to understand is a key part of advancing that agenda, Brummer added.&nbsp;



The Commodity Futures Trading Commission (CFTC) spends a lot of time and resources on ensuring crypto companies are operating within the appropriate guidelines, according to Vincent McGonagle, director of the division of market oversight.&nbsp;



“A strong enforcement program supports market integrity and customer protection,” McGonagle said. “We&#8217;re looking at fraud, pump and dump manipulation, illegal contracts that are being offered to us customers, not only within the US, but from entities outside of the US. If there is a violation of the act of the regulation, the CFTC has strong enforcement authority to deter that misconduct, and if it involves a criminal violation, we work closely with our cooperative enforcement partners at the Department of Justice as well as the US Attorney&#8217;s Offices.”&nbsp;



Charles Hoskinson, co-founder of blockchain engineering company Input Output Global and the Cardano blockchain, agreed with Levin that crypto’s transparency is an asset to regulators.&nbsp;



​​“One of the powers of our industry is the fact that regulation can become algorithmic,” Hoskinson said. “So you don’t have to think, ‘which person is going to sit down and look at this big pile?’”&nbsp;



Blockchain technology could significantly enhance the efficiency of many government agencies, he added.&nbsp;



“Think of the IRS and tax returns,” Hoskinson said. “We could quadruple the size of the IRS, but we still couldn’t audit every single American — it’s just not possible.”



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Congress: Are Crypto Disclosures Doing Enough for Investor Protection?

Macauley Peterson

<div id="highlights-block_6259a583bdb9a" class="highlights">
 <ul>
 <li>The Tornado Cash front-end website will prevent access from OFAC-sanctioned wallet addresses</li>
 <li>The immutable smart contracts underpinning the mixing service remain unchanged, and therefore function the same as before</li>
 </ul>
 
</div>



The privacy tool Tornado Cash, which <a href="https://cms.blockworks.co/the-purpose-and-perils-of-crypto-privacy-tools/" target="_blank" rel="noreferrer noopener">has been used</a> to obfuscate the proceeds of multiple frauds, scams and hacks in the past, updated its web front-end on Friday to limit access from wallet addresses sanctioned by the US Treasury’s Office of Foreign Assets Control (OFAC).



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Tornado Cash uses <a href="https://twitter.com/chainalysis?ref_src=twsrc%5Etfw">@chainalysis</a> oracle contract to block OFAC sanctioned addresses from accessing the dapp. Maintaining financial privacy is essential to preserving our freedom, however, it should not come at the cost of non-compliance.<a href="https://t.co/tzZe7bVjZt">https://t.co/tzZe7bVjZt</a>&mdash; 🌪️ Tornado.cash 🌪️ (@TornadoCash) <a href="https://twitter.com/TornadoCash/status/1514904975037669386?ref_src=twsrc%5Etfw">April 15, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The move follows an <a href="https://cms.blockworks.co/treasury-sanctions-north-korean-hacker-group-confirms-ties-to-625m-hack/" target="_blank" rel="noreferrer noopener">update from OFAC</a> yesterday, which identified the wallet known to have received the funds <a href="https://cms.blockworks.co/sky-mavis-ronin-network-bridge-exploited-for-over-600m/" target="_blank" rel="noreferrer noopener">stolen from the Ronin Bridge</a> last month as controlled by the North Korean hacking organization Lazarus Group. The wallet still contains 144,000 of the original 173,000 ether, worth about $439 million as of Friday at 1:30 pm ET.



The change to Tornado Cash’s decentralized application (dapp) has no impact on the underlying privacy protocols’ code — a set of smart contracts on Ethereum meant to bring some measure of privacy to transactions on the transparent public blockchain network.



Understanding the difference between a protocol and a website that adds ease-of-use is not always easy for newcomers to Web3, as evidenced by the recent Uniswap class action lawsuit.



In the Web2 world of Google and Facebook, a website runs on a server owned by a company that exists in some country’s jurisdiction. In the case of Tornado Cash, the smart contract code runs on public Ethereum and cannot be changed, <a href="https://docs.tornado.cash/general/readme" target="_blank" rel="noreferrer noopener">the project’s documentation explains</a>.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Nobody — including the original developers — can modify or shut them down,” the documentation says.</blockquote>



The service is <a href="https://twitter.com/TornadoCash/status/1213660104743981058?s=20&amp;t=UdLudtsYp9VJMT81HALbZA" target="_blank" rel="noreferrer noopener">even accessible</a> from decentralized storage infrastructure known as IPFS rather than on any particular centralized web server.



<h3 class="wp-block-heading">So, what does this mean for the hackers?</h3>



The main user interface to Tornado Cash is an application that implements a <a href="https://etherscan.io/address/0x40c57923924b5c5c5455c48d93317139addac8fb" target="_blank" rel="noreferrer noopener">Chainalysis sanctions oracle</a> — basically a blacklist of Ethereum addresses maintained by the blockchain data platform Chainalysis. The address used in the Ronin hack has been added to that list.



But the Tornado Cash protocol itself can still be used as before, using an alternative front-end user interface. That doesn’t mean it can be used successfully to obscure the origins of the ether stolen in the Ronin bridge exploit, however.



Chainalysis co-founder Jonathan Levin has touted the firm’s ability to unmask transactions from mixers like Tornado Cash, especially when they contain large amounts of value relative to the total liquidity available.



“The fact that all of the industry and all of law enforcement and the regulatory authorities can all have access to that same information about what services and what entities are behind these transactions, that allows us to take unprecedented steps in being able to collaborate on weeding out illicit activity,” Levin <a href="https://cms.blockworks.co/impossible-for-russia-to-evade-sanctions-with-crypto-fincen-rep-says/" target="_blank" rel="noreferrer noopener">told a Senate panel</a> in March.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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