OFAC Seeks Balance Between Crypto Enthusiasm and Regulation


On May 6, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury. appointed a cryptocurrency blender, Blender.io, as a Specially Designated National (SDN). That sanction follows a series of executions and sanctions that we have discussed previously. here Y here.

The action is the latest in a fascinating exchange between the crypto industry and its regulators, as both sides explore a new world of currency movement and what controls can and should be put in place. To illustrate the parties’ positions, we provide the following discussion between an enthusiastic cryptocurrency blockchain lawyer (played by our partner, Gabriel Khoury) and a skeptical regulatory lawyer (played by our partner, Reid Whitten).

Please note that we are not attempting to resolve what is sure to be an ongoing debate, we are merely laying out the landscape of the discussion by clarifying some points of view from the various stakeholders. We are, (to borrow a terribly hackneyed phrase), “starting the conversation.”

Enthusiastic: First, some background on Blender, which is a cryptocurrency “mixer”. Mixers obscure the identity of your crypto and reduce the chances of your crypto being tracked by third-party tracking software. A cryptocurrency mixer is mostly used for legitimate reasons.

Skeptical: Woof, woof, woof! Objection. That’s a pretty speculative characterization. Feel free and name the legitimate reasons for a mixer. maybe be used, but we’re going to be easy on the editorial as soon as possible.

Enthusiastic: Ok, just the facts then. Many centralized cryptocurrency exchanges track all transactions, which can easily expose a user to illicit actors, people who could spy on or steal their data. Using a mixer, you can hide your crypto transactions from those illicit actors. . .

Yes, and as I can see you’re taking pains to point out, they can also be used to hide transactions from prying governments.

Skeptical: Ahem.

Enthusiastic: Well, from governments, nosy or not.

With Bitcoin, for example, if a user, we’ll call it User A, sends a Bitcoin to User B, that transaction is recorded and visible on that blockchain. Mixers are software applications that mix User A’s crypto payment with other users’ cryptocurrencies and send a combination of the cryptocurrencies to one or more addresses designated by User A. That mixing process breaks the chain link between the addresses. wallet, which improves user privacy and autonomy. Therefore, the fact that user A sent a Bitcoin to user B cannot be easily discerned from that blockchain record.

Skeptical: Right, so one user, User A, puts their Bitcoins or Dogecoins or whatever, the mixer spins them with the Bitcoins and Dogecoins and Ethereum and Tether of a bunch of other users, then gives it back to User A (or the User B) A equivalent value of the resulting mix of coins. User A and User B do not know the origin of their new assortment of coins, only that it has the equivalent value of what they put in (minus, presumably, some mixing service fee). It’s okay?

Enthusiastic: That’s how it is. Today, blockchain analytics companies can quite easily track who owns which crypto wallet. So these cryptocurrency mixers revive the original libertarian crypto ideals of privacy, autonomy, and decentralization that Bitcoin originally promised. White paper.

Skeptical: Okay, but the mixer is expressly designed to hide where the funds come from! That’s not too far from a literal washing machine in the sense that it can mix and clean illicit funds, mask them, and make them untraceable (well, it’s still a figurative washing machine, but you get the idea).

One can imagine User A saying to the authorities: “What, me? Withhold the proceeds of a crime? Why not at all! This is just the random assortment of coins that came out of the mixer! They couldn’t possibly be attributed to a crime.

Enthusiastic: Maybe, but let’s think bigger than that. There are actually at least four reasons why a person would use a mixer to: (1) secure their crypto by hiding the source of transactions on an open network; (2) prevent hacks by obscuring the movement of your crypto; (3) safeguard your identity; and (4) avoid government regulation by keeping the volume of your transactions private.

Skeptical: Hmmm, that last one could also be called “tax evasion”.

Enthusiastic: Maybe, and I’ll also admit that money laundering should probably be on that list as a fifth possible use of a mixer. However, OFAC does Sure that most virtual currency activity is legal, and most illicit uses are prevented by implementing appropriate anti-money laundering/counter-financing of terrorism (AML/CFT) controls and sanctions to prevent Sanctioned individuals and other illicit actors exploit virtual currency to undermine US foreign policy and national security interests. It is also worth noting that some private crypto mixers comply with the legal requirements of the Bank Secrecy Act.

Skeptical: Interesting, but I would like to point out that, just last year, a Bitcoin mixer operator promised guilty to a $300 million money laundering conspiracy, a Russian-Swedish citizen was stopped for allegedly laundering $335 million worth of cryptocurrency through a mixer, and a hacker stole over $33 million from a major cryptocurrency exchange, then allegedly laundered the coin through a cryptocurrency mixer. And these examples are just the ones the federal government has picked up!

Enthusiastic: . . . and you might consider that those examples could be considered amazing for the crypto industry! Think about it, market participants don’t want illicit actors stealing their hard-earned money, and mixers help protect themselves from these illicit actors by hiding and protecting participant funds. The more illicit actors are caught using mixers, the more legitimate the mixers can become because they are weeding out bad actors.

Skeptical: That’s an interesting insight, but it sounds like mixers would have a long way to go before he could see them beyond an impediment to law enforcement. I mean, the nice thing about blockchain, from a regulator’s perspective, is that once they find the “bad actor,” they can trace the transactions from the actor’s wallet through the blockchain’s immutable ledger. If the bad actor takes money out of North Korea in crypto, and the FBI can connect that actor to the wallet that took the money out of a sanctioned country, then there is a permanent and invariable problem. public record of where that money goes!

And I don’t mean to mess with cryptocurrency mixers. Mixers aren’t the only way criminals use crypto to avoid law enforcement. There are also privacy-focused tokens that offer (seemingly) complete separation between the wallet address and the holder’s identity.

Perhaps we can agree that there are many considerations here, much to regulate, but probably also some deference to the advantages of a successful, mostly anonymous means of transacting.

Enthusiastic: I agree on all counts. Criminals trying to avoid law enforcement will happen whether crypto mixers exist or not. I would argue that crypto transactions are generally safer than suspicious cash transactions because the blockchain allows for a literal public ledger. Delivering cash in a briefcase without witnesses makes it virtually impossible to trace the funds.[1] At least with blockchain technology, some kind of ledger is kept.


Cryptocurrency market participants need to pay attention to the regulatory space in the coming weeks and months. Following President Biden’s Cryptocurrency executive order, state and federal crypto enforcement has increased at a faster rate than ever before. This indicates that these agencies are preparing for a regulatory storm next year. Stay tuned for updates as we continue the conversation here.[2]


[1] Please note that is definitely it is not legal advice, or really any kind of life advice. Please do not give or accept briefcases full of cash based on any statement in this article.

[2] *Sigh* Sorry, we promise to find a more original terminology.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.Journal of National Law, Volume XII, Number 153