Tether – the issuer of USDT, the world’s largest stablecoin – is yet to freeze addresses associated with the privacy protocol Tornado Cash.
That means USDT holders can still technically use the smart contract to obfuscate their funds. However, it remains unclear whether Tether’s permissiveness amounts to a violation of U.S. sanctions.
According to a statement from Tether on Wednesday, the Office of Foreign Assets Control (OFAC) has established no expectations that stablecoin issuers must freeze secondary market addresses operated by sanctioned entities.
Tether clarified that it would willingly freeze a private wallet address (not exchanges/services) if asked by a verified law enforcement agent. However, none have made any such request of the company pertaining to Tornado Cash, despite Tether’s near-daily contact with relevant entities.
Until it receives such a request, Tether said it would be “reckless” to enact a unilateral freeze against secondary market addresses.
“Even if Tether recognizes suspicious activities on such an address, completing a freeze without the verified instruction of law enforcement and other government agencies might interfere with ongoing and sophisticated law enforcement investigations,” the company explained.
Tether noted that, in some instances, it has been specifically instructed by law enforcement not to freeze potentially criminal addresses. Doing so could alert suspects of the investigation, trigger liquidations, and jeopardize future connections.
Tether added that it is “not a US person,” nor does it onboard US persons as customers. “However, Tether does consider OFAC Sanctions as part of its world-class compliance program,” said the firm’s chief technology officer Paulo Arduino.
According to the Washington Post, the Treasury Department declined to comment on whether it considers Tether to be in violation of Tornado Cash sanctions.
When sanctions against Tornado Cash were revealed earlier this month, Circle – the issuer of USDC – reluctantly, but hastily complied. Chief executive officer Jeremy Allaire said the company was required to do so under Bank Secrecy Act (BSA) requirements, and that “nearly all responsible registered Virtual Asset Service Providers” would also follow suit.
While true of many services in the Ethereum ecosystem (ex. Aave), multiple other stablecoin providers are yet to take similar action. These include Paxos – the issuer of BUSD and USDP – as well as MakerDAO, the issuer of the algorithmic stablecoin DAI.
In fact, MakerDAO’s co-founder has explicitly proposed swapping the stablecoin’s reserves out of USDC into ETH, in order to escape potential OFAC capture.