สวัสดีผู้ที่ชื่นชอบฟินเทค! Hint: think of a Southeast Asian country that will soon pilot a retail central bank digital currency which will look very similar to the digital yuan. If you’re still stumped, think pad Thai!

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The sanctions imposed on August 8th by the Department of the Treasury’s Office of Foreign Assets Control (OFAC) against the crypto mixer Tornado Cash continued to be the center of attention in the crypto world this week. Two days after OFAC announced the sanctions, the Dutch Fiscal Information and Investigation Services (FIOD) arrested the 29-year-old developer Alexey Pertsev, who is believed to be part of Tornado cash, in Amsterdam. In the arrest statement, FIOD cited Pertsev’s “involvement in concealing criminal financial flows and facilitating money laundering through the mixing of cryptocurrencies.” FIOD also mentioned the same reasons that motived OFAC’s move: the role of Tornado Cash in concealing large-scale criminal money flows, including funds hacked by “a group believed to be associated with North Korea.”

The arrest was met by an outcry from the crypto community. While OFAC and FIOD did not confirm or deny any coordination, the arrest of Pertsev demonstrated the de facto global enforcement powers of OFAC, which goes well beyond the boundaries of the U.S. Also, various actors showed resistance to the idea of OFAC “sanctioning a code”, even though it is not unprecedented. Fight for the Future (FFTF), a non-profit advocacy group in the area of digital rights whose primary focus is online privacy and censorship, condemned OFAC’s sanctions, insisting that they were imposed in a way “that compromises human rights and the first amendment.” FFTF called for narrower sanctions that target specific persons instead of punishing an open-source code because, for FFTF, “[c]ode is speech.” The violations of constitutional rights possibly implicating OFAC’s sanctions were the very reason Coin Center, another non-profit research and advocacy center that focuses on crypto policy, decided to explore bringing a legal challenge to the sanctions.

From the perspective of OFAC, sanctioning specific persons might not be feasible. As we discussed last week, Tornado Cash is a fully-decentralized code, meaning that it is not owned by any single entity or person. How is it governed, then? Well, by a decentralized autonomous organization (DAO), which is a completely horizontal body that has no hierarchical authority (remember that the very impetus for blockchain technology was to get rid of any form of centralized power). DAOs issue tokens that are owned by different persons and are used to cast votes on the governance of the DAO, which are then implemented (i.e., written) in the publicly available smart contracts (i.e., the code) governing the DAO’s operations on the blockchain. Tornado DAO reportedly has more than 9,000 members out of which only 163 are actively participating in governance decision-making. Last week, it convened to discuss the best course of action. Interestingly (or ironically), in response to calls to raise funds by Tornado Cash to challenge OFAC’s decision, some DAO delegates argued that there is no legal person named “Tornado Cash” and that raising funds this way could “open up a whole new can of worms that is misleading and dangerous.”

Given the fully decentralized nature of Tornado DAO, are there any convincing grounds for targeting specific developers by law enforcement agencies for alleged illicit activities? Which makes more sense to you: sanctioning specific persons or the code itself? And do you think the horizontal structure of DAOs, although democratic, could be the Achilles heel of these organizations when big decisions need to be made?

Ready for one more story, this time about the Federal Reserve? Actually, there are two. On August 16, the Federal Reserve issued new guidelines that create a multi-tiered review system to evaluate applications for access to the Reserve’s master accounts or, in other words, access to the Reserve’s liquidity. The rigor of review will be determined by the type of entity applying for access. Wyoming-chartered special purpose depository institutions (SPDIs), such as Custodia and Kraken, will most likely fall into the third tier, which comprises entities that are "not federally insured and not subject to prudential supervision by a federal banking agency." But even though SPDIs will be subject to a strict review, they are now closer than ever to officially being part of the payment system. On the same day, the Federal Reserve Board released a new “Supervision and Regulation Letter” requesting supervised banks to (a) notify the Board before engaging in crypto-asset-related activities, (b) assess the legality of those activities, and (c) make sure to have systems in place to mitigate various risks. The Letter, however, neither defines the “crypto-asset-related activities” it refers to, nor mentions any enforcement mechanism that will be used to ensure compliance with the new requirements.

In your opinion, what does it mean for neobanks, such as Cusotdia or Kraken, to be regulated by the Federal Reserve instead of another regulator, especially the Securities and Exchange Commission?

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See you next week!