Congressmen Issue Letter On Tornado Cash

• Congressmen criticize ongoing use of Tornado Cash despite US Sanctions
• Urge FinCEN to finalize NPRM establishing recordkeeping and reporting requirements for mixers
• The Letter is authored by Representatives that proposed a two yeaer mixer ban

Seven members of Congress have sent a letter to Treasury Secretary Janet Yellen and Under Secretary for Terrorism and Financial Intelligence Bradley Smith on the ongoing use of Tornado Cash despite US Sanctions.

"This problem shows zero signs of going away anytime soon," the Congressmen write.

"In March 2024, the Lazarus Group moved $147.5 million in cryptocurrency through Tornado Cash that was stolen from a hack of the HTX cryptocurrency exchange last November," the letter states. "In the first half of this year, Tornado Cash accepted more than $1.8 billion in deposits."

Citing Tornado Cash's pitch to potential investors in 2020, in which the developers described the software to ensure "complete privacy," the Congressmen state that "it is easy to see why cryptocurrency mixers would be extremely attractive to money launders, terrorists, sanctions evaders, drug and human traffickers, child abusers, cybercriminals, and other illicit actors."

The Congressmen claim that "Cryptocurrency mixers [...] are used by a variety of illicit actors," including "Hamas and the Palestinian Islamic Jihad."

The Congressmen are now asking the Treasury and the Under Secretary for Terrorism and Financial Intelligence to clarify the risk mixers like Tornado Cash pose to national security, urging FinCEN to finalize its proposed rule making on cryptocurrency mixers.

In 2023, FinCEN issued a Notice of Proposed Rule Making (NPRM) that would regulate cryptocurrency mixers under Section 311 of the Patriot Act, allowing the Treasury to require domestic financial institutions and financial agencies to take certain “special measures” against the entity of primary money laundering concern.

The NPRM would require financial institutions to oblige to proposed recordkeeping and reporting requirements spanning the amount of CVC [Convertible Virtual Currency] transferred, the CVC mixer used, the CVC wallet addresses associated with the mixer's customer, the transaction hash, the date of the transaction, the IP addresses and timestamps associated with the transaction, and a narrative description of the activity observed.

The proposed rule has received over 2,000 public comments, many of which appear to describe the rule as overly broad.

The lawyer and developer community LeXpunk notes that "the rulemaking to address these issues must be evenly applied, risk-based, and fit for purpose," and that "the current Proposal meets none of these criteria and instead seeks to vilify a particular technology rather than address the root cause transactions cited in the Proposal as involving “likely illicit sources".”

Similarly, Rafael Yakobi of The Crypto Lawyers PLLC issued a comment on behalf of 26 industry members detailing the overly broad application of the rule, as it "targets lawful activity in a way that makes the agency’s proposed action arbitrary and capricious," arguing that the rule is "an improper and overbroad application of Section 311 measures to achieve transaction surveillance and suppression that FinCEN does not otherwise have a lawful basis to undertake."

Notably, Yakobi's response was initiated by the developers of Samourai Wallet, who are currently facing criminal charges in the Southern District of New York.

The Letter to the Treasury was authored by Representative Sean Casten, who had previously come under scrutiny for accepting funds from FTX associates, and signed by Representative Brad "Hamstercoin" Sherman and Representative Emmanuel Cleaver, who together introduced the Blockchain Integrity Act in May of this year, which proposes a two year mixer ban.