The recently arrested software developer behind the Tornado Cash “coin mixer” is believed to have ties to Russia’s top security agency, adding yet another layer of controversy to an already sketchy “crypto” service.
Earlier this month, the Netherlands’ Fiscal Information and Investigation Service (FIOD) arrested Alexey Pertsev, the 29-year-old developer behind the Ethereum-based Tornado Cash protocol, on suspicion of ” involvement in concealing criminal financial flows and facilitating money laundering”. The arrest came shortly after the US Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash and blacklisted Ethereum addresses that used its services.
OFAC justified its sanctions by claiming that a good portion of the US$7.6 billion in tokens that were introduced into Tornado Cash were the proceeds of criminal activity. This includes funds stolen by North Korean state-sponsored hackers and other malicious actors seeking to launder stolen funds through DeFi exploits, etc.
Critics argue that OFAC is ignoring the fact that the bulk of tokens that pass through Tornado Cash are not tainted with any criminal connection. But OFAC essentially argues that’s kind of the point: if there were no legitimate tokens going into Tornado Cash, there would be no way to clean up the crime coins. Additionally, OFAC says Tornado Cash “has repeatedly failed to impose effective controls” to mitigate these risks. (In the first half of this year, it is estimated that three-quarters of all Ethereum-based money laundering used Tornado Cash.)
Pertsev is the founder/CEO of PepperSec Inc, a Delaware-registered/Seattle-based company that describes itself as a security consulting firm made up of “white hat” hackers. In addition to Tornado Cash, PepperSec also claims credit for creating the Token MultiSender app which allows users to send tokens to “thousands of addresses” in a single transaction.
On August 24, Kharon, a software company that provides data and analytics tools to support financial crime compliance programs, reported that in 2017, Pertsev was working for Digital Security, a Russian entity that was sanctioned by OFAC in 2018 for his work on “a project that would augment Russia’s offensive cyber capabilities for Russian intelligence.”
These services include the Federal Security Service (FSB), the successor to the infamous Russian KGB. Pertsev reportedly worked as an information security specialist and developed smart contracts for digital security, which OFAC said provided “material and technological support to the FSB” as early as 2015.
Pertsev’s wife denied that her husband was ever “associated” with the FSB or similar Russian agencies. Pertsev learned this week that he will spend at least another three months in pre-trial detention in the Netherlands pending possible money laundering charges.
Ethereum has a growing reputation as the go-to blockchain for rogue countries looking to conduct financial business on the QT In April, former Ethereum Foundation researcher Virgil Griffith was sentenced to 63 months in prison after surrendering in North Korea in 2019 to brief officials on how to “work around current sanctions” imposed by US authorities.
Recess is over
Prominent “crypto” brethren such as Kraken’s Jesse Powell have denounced OFAC’s targeting of Tornado Cash and the associated blacklisting of Ethereum addresses that used the service, although some of those same critics have nevertheless complied with the blacklisted lest they too learn the folly of defying federal authorities.
Circle, part of the group that issues the US Dollar Coin stablecoin, froze a large amount of USDC tied to sanctioned addresses following the OFAC announcement, prompting howls of outrage from the “code is law” crowd. But Circle is a US-based company (as is Kraken), which makes it seriously vulnerable to backlash if it’s seen as too blatant a snub to US authorities.
Circle rival Tether, which issues the largest stablecoin by market capitalization (but certainly not by reserve assets), issued a statement this week noting that “Tether is not a US person, does not operate in the United States. States or onboard US people as customers.” Tether then attempted to claim crypto bro brownie points claiming it was ‘holding company’ not to “unilaterally freeze” USDT tokens in private digital wallets linked to suspected criminal activity.
However, Tether’s self-flattering bluster almost immediately crumbled as he admitted that he had not yet received any direct requests from US authorities regarding Tornado-related wallets and that he “normally complies” with such requests. In other words, Tether stands tall and proud until he is asked to bend his knee, after which he bends over like a cheap whore who got punched in the stomach by a fat guy with sores on her face.
Of course, complying with legal demands to reduce criminal activity shouldn’t be so controversial, especially if blockchain-based entities hope to one day emerge from their underground ghettos and gain a permanent position in the world of mainstream finance. . But time and time again, the crypto bros go for public tantrums, demanding to stay on the playing field forever.
Bitcoin SV (BSV) is virtually unique among blockchains in that it was designed from the ground up to work within existing systems and with financial authorities, cleverly avoiding any futile discussions of dismantling and supplanting the worlds of finance and justice as we know them. After all, the code is not the law; The law is the law. Those who insist otherwise, as Nicholas Weaver recently said, OFAC around and discover.
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Ethereum, FTX, and Tether, which co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) market players.
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