The San Francisco-based cryptocurrency exchange managed to avoid a collision with the Treasury Department's sanctions office that took such a hard line against the Tornado Cash mixer.
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If you want to know why it's best to 'fess up to your mistakes, you don't need to look any farther than Kraken, a regulated U.S. cryptocurrency exchange which just paid a $362,000 fine for violating sanctions by letting Iranian nationals use its services.
Eight hundred and twenty six times.
Which sounds kind of bad until you read the statement the U.S Treasury Department released on Nov. 28 announcing the settlement. Specifically:
"The statutory maximum civil monetary penalty applicable in this matter is $272,228,964."
Which means Kraken paid 0.133% of a fine that could have gone north of a quarter billion dollars.
There are a couple of reasons why the fine was that low, which amounts to Kraken reported the violation itself, the problem was a technical flaw that allowed Iranians to get around Kraken's generally good Know Your Customer controls, and the company agreed to spend another $100,000 to improve its compliance systems.
Ramping Up Sanctions
But it's also noteworthy because the Treasury Department's Office of Foreign Asset Control (OFAC), which imposes and regulates sanctions, has its eye firmly on crypto at the moment.
OFAC set a new precedent on Aug. 8, when it imposed sanctions on Tornado Cash, a crypto mixing service designed to make it hard if not impossible to track cryptocurrency transactions — allowing, in that case, North Korean government hackers known as the Lazarus Group to launder $455 million of the $620 million it allegedly stole in from Axie Infinity's Ronin bridge in March.
Among other things, that meant anyone with funds on Tornado Cash had to apply for a special OFAC license to legally withdraw their property — something that required submitting an extensive amount of personal data, as well as wallet addresses for the sender and recipient, and the amounts involved.
Which is to say, exactly what mixing service users are trying to avoid — to protect their privacy according to supporters and to either launder money or avoid taxes according to critics.
Another crypto prankster pointed to another problem with smart-contract managed DeFi projects by sending small amounts of Ether to a number of high-profile crypto users with known wallet addresses — including talk show host Jimmy Fallon, influencer Logan Paul and NFT artist Beeple, among others.
As crypto transaction recipients technologically cannot refuse refunds sent to them, it put them all technically in violation of sanctions, which can bring serious criminal charges. The Treasury Department said it would "not prioritize enforcement" against the "dusting" recipients — but did not say no action would be taken, either.
Another U.S.-based cryptocurrency exchange, Coinbase, is backing a lawsuit challenging the legality of the sanctions, which because Tornado Cash is a decentralized finance project were imposed not on a person or business — a legal "person" — but on software code. That is something that has never been done before and raises serious First Amendment issues, according to crypto industry group Coin Center and the Electronic Frontier Foundation (EFF), a civil rights group with a tech and internet focus.
Dutch authorities, however, arrested Tornado Cash's developer, Alexey Pertsev, in August for facilitating money laundering — even though he had no remaining control over Tornado Cash. Latest reports are that he will be held at least until February.
