On August 8, 2022, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) announced its second-ever designation of a virtual-currency mixer—Tornado Cash ("Tornado")—which was used to launder several billion dollars' worth of virtual currency, including funds stolen by a North Korean state-sponsored hacking group.1 Just months ago, OFAC issued its first designation of a virtual-currency mixer—Blender.io—for similar activity.2 As a result of OFAC's designation, all property and interests in property of Tornado and its 50% or more owned subsidiaries are blocked and must be reported to OFAC, and U.S. Persons3 are generally prohibited from directly or indirectly transacting or dealing with them absent a license. This designation (1) reflects the Treasury Department's increased focus and scrutiny on digital-asset companies and related service providers, (2) indicates that mixers should be considered high risk by virtual-currency firms, and (3) demonstrates the importance of adequate and appropriately risk-based anti–money laundering (AML) and sanctions controls.
Virtual-currency mixers anonymize cryptocurrency transactions by shuffling them to obfuscate the source and destination of the currency.4 Because an essential component in complying with AML and sanctions regulations is to know your customer (KYC), mixers present clear AML and sanctions compliance risk. Moreover, if doing business in the United States, mixers and tumblers are likely money services businesses (MSBs) that must register with the U.S. Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") and maintain an AML program and implement appropriately risk-based AML controls. To this point, in October 2020, FinCEN issued a first-of-its-kind $60 million penalty against the founder and operator of two virtual-currency mixers for failing to register them as MSBs and for willfully violating their AML requirements under the Bank Secrecy Act.5 OFAC's subsequent designations of mixers Tornado and Blender.io reflect Treasury's focus on digital-asset companies and related service providers, as Treasury promises to "continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them."6
Virtual-currency companies (among others) are expected to have an appropriately risk-based AML and sanctions compliance program that considers the unique risks posed by their customers, geographic areas of operation, services, and more. Importantly, OFAC notes that "mixers should in general be considered as high-risk by virtual currency firms, which should only process transactions if they have appropriate controls in place to prevent mixers from being used to launder illicit proceeds."7 AML and sanctions regulations, requirements, and regulatory expectations are complex, but failings in these areas can result in significant issues, including, but not limited to, criminal and civil penalties, sanctions designation, and reputational and practical issues.
1. U.S. Dep't of Treasury, U.S. Treasury Sanctions Notorious Viral Currency Mixer Tornado Cash (Aug. 8, 2022), https://home.treasury.gov/news/press-releases/jy0916.
2. U.S. Dep't of Treasury, U.S. Treasury Issues First-Ever Sanctions on a Virtual Currency Mixer, Targets DPRK Cyber Threats (May 6, 2022), https://home.treasury.gov/news/press-releases/jy0768.
3. "U.S. Person" means any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States. See E.O. 13694 § 6(c).
4. Robert Stevens, Bitcoin Mixers: How Do They Work and Why Are They Used, CoinDesk (Mar. 8, 2022) https://www.coindesk.com/learn/bitcoin-mixers-how-do-they-work-and-why-are-they-used/.
5. See Winston's previous briefing on this matter here: https://www.winston.com/en/global-trade-and-foreign-policy-insights/fincen-issues-first-of-its-kind-dollar60-million-penalty-against-operator-of-bitcoin-mixers.html.
6. See supra note 1.
7. See id.
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