Argentina - A stablecoin provider gets caught in the crosshairs of OFAC’s Tornado Cash sanctions
MakerDAO, the provider of DAI stablecoins, is popular in Argentina. Now it's worried about OFAC blowback.
The sanctions of Russia-based developer Roman Semenov’s crypto mixer is having far-reaching implications that could upend the business model of a key crypto firm in Argentina.
On 8 August, OFAC sanctioned Tornado Cash, an Ethereum privacy protocol used for mixing and anonymizing crypto funds. The Tornado Cash sanction is unprecedented because it sanctions a protocol - a tool - and not an individual or an entity. In other words, the OFAC measure means that any individual or entity interacting with Tornado Cash is in violation of US sanctions.
It’s clear the crypto community has a lot of opinions on whether OFAC has constitutional authority to sanction a protocol versus an individual or an entity. It’s an important debate, but let’s set it aside for a minute and look at the ripple effect of these sanctions elsewhere.
What is interesting about this OFAC sanction is its potential implications for a Copenhagen-based stablecoin provider called MakerDAO, which produce and manage DAI stablecoins. Argentina is one of the firm’s most important markets. That’s because DAI is a critical piece of financial infrastructure for cross-border payments at a time when the Alberto Fernandez government is ratcheting up capital controls in an effort to tamp inflation.
The risk is complex. Some think that the actual protocol Tornado Cash is not blocked, but the individuals using it violate OFAC sanctions. Crypto expert Eric Vorhees insisted that MakerDAO should unwind the USDC holdings that back the firm’s stablecoin DAI because of the threat that these sanctions pose to its business.
The threat is called a ‘dust attack.’ In other words, if an attacker taints USDC by running it through Tornado Cash and sending the USDC to MakerDAO, then that USDC is tainted and users of MakerDAO’s stablecoin are in violation of US sanctions. An attacker would likely take aim at USDC for greater effect than just MakerDAO, of course, but the point is that DAI would get caught in the cross hairs.
This is probably what MakerDAO is most concerned about. Founder Rune Christensen of MakerDAO said that the firm would need to shut down if US sanctions end up targeting volumes of USDC underlying the DAI stablecoin.
So, while it is hard to imagine the US Treasury coming after individuals in Argentina, it is easy to imagine Circle, the company that manages USDC, to shut down Ethereum addresses corresponding to the tainted stablecoins.
In fact, it has already begun. Circle’s Jeremy Allaire said that it was complying with US sanctions by cutting off 38 addresses mentioned by US Treasury to USDC. Allaire also challenged the sanctions, insisting that choking off USDC access to the entire Tornado Cash protocol is flawed.
Circle operates USDC in partnership with Coinbase through a consortium called Centre. The consortium launched USDC in 2018.
There are a few surprising takeaways here. First, even though crypto is still young, these sanctions show just how intertwined critical pieces of crypto infrastructure are in countries where reliance on stablecoins is key for doing international business. Second, the power of OFAC is astonishing and this should send a signal to investors, developers, and miners in the crypto space that AML and KYC will be enforced across the globe as long as it involves US infrastructure.
Banks in Latin America will need to tread carefully as they integrate these technologies into their practices. Governments, too, that have let companies flourish in a wild west regulatory environment should take note of OFAC’s heavy hand and respond.