Follow-up: Now Circle moves to Freeze All Blacklisted Tornado Cash Smart Contract Addresses

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Merely nine hours ago or so, I published an article [Nagoda, K. U.S. Treasury OFAC Bars Residents From Using Tornado Cash and Added 44 Addresses to the Specially Designated Nationals List. (Accessed August 9, 2022)]. On reading the 'Crypto News' this morning, I learned of an important update to that article and I share the same with you now.

"Circle Internet Financial Ltd., the issuer of the USDC stablecoin, froze over 75,000 USDC in funds linked to 81 sanctioned addresses at the cryptocurrency mixer Tornado Cash on Monday, according to data from crypto aggregator Dune Analytics" [Keller, L. Circle freezes smart contract addresses linked to blacklisted Tornado Cash. (Accessed August 9, 2022)].

"A Twitter bot named USDC Blacklist, which scrapes the blockchain for USDC blocklists, highlighted the issue as it tweeted multiple times through Monday after the sanction was issued [...] The addresses tweeted out by USDCBlacklist match those on the record released by the US Treasury" [Wright, L. Circle ‘blacklists’ all Tornado Cash ETH addresses effectively freezing USDC. (Accessed August 9, 2022)].

Of somewhat greater import are the continuing implications and repercussions flowing from the sanction:

All U.S. persons and entities are prohibited from interacting with the virtual currency mixer's USDC and Ethereum smart contract addresses on the SDN list. Penalties for willful noncompliance can range from fines of $50,000 to $10,000,000 and 10 to 30 years imprisonment. An estimated $437 million worth of assets, consisting of stablecoins, Ethereum, and wrapped Bitcoin (WBTC), are currently held in Tornado Cash's smart contract addresses. As a result, issuers are expected to take steps to prevent the transaction or redemption of such assets [...] Simple interactions such as Gitcoin donations, working for the project, running or downloading its software, visiting its website, and depositing/withdrawing from smart contracts could be interpreted as violations.

[Sun, Z. Circle freezes blacklisted Tornado Cash smart contract addresses. (Accessed August 9, 2022)].

"Both the entities behind USDC and Tether can freeze their stablecoin transfers to and from Tornado Cash on the Ethereum smart contract level. Meanwhile, Palo Alto, California-based BitGo, would also, theoretically, need to restrict access to Tornado Cash to comply with such sanctions. One possible method is suspending the redemption of Tornado Cash-linked WBTC" [Id].

In June, 2022, Anthony Sassano, Founder of the Daily Gwei newsletter, made the claim that the USDC held in any address can be frozen by Circle at any time and for any reason:

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"Circle CEO and co-founder Jeremy Allaire responded by calling Sasson’s claims inaccurate and unhelpful FUD while linking a blog article posted in May, titled, 'Why developers can trust USDC" [Wan, S. Circle CEO fails to dismiss allegations USDC users can be blocked. (Accessed August 9, 2022)].

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In this Developer Q & A, Circle's policy on blocking addresses is illuminated. Quoting directly from the Q & A:

Q: If I use USDC in my protocol/application, can my protocol/application be blocked?

USDC is designed with a high standard for trust, transparency and accountability. Circle and the Centre Consortium only block addresses when we are legally required. This includes court-ordered interventions as well as sanctions compliance following U.S. and international rules. These rules are also designed to protect privacy, and promote competition and interoperability. We take this responsibility very seriously and can share the following data: Of the total $53B+ USDC in circulation, only $2.7M USDC is currently blocked. A total of 38 unique addresses have ever been blocked to date, all of which comply with OFAC sanctions and court orders.

Importantly, the blocking of addresses emits events on-chain, and we encourage the community to monitor those events. Blocking is never done unilaterally or arbitrarily and follows the highest duty of care.

[Chandhok, N. Why Developers Can Trust USDC. (Accessed August 9, 2022)].

And finally, with regard to Circle's compliance program, the Q & A provides the following:

Q: Does Circle monitor on-chain USDC transactions?

Circle maintains a compliance program consistent with its legal obligations, which includes controls such as (but not limited to) robust KYC, transaction monitoring, and sanctions screening. These are implemented on Circle’s business customers using Circle Account and Circle APIs. These practices ensure that the issuance and redemption of USDC into and out of the traditional financial ecosystem can be trusted.

[Id].

A complete text of the Circle Developers Q & A may be accessed by clicking here

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