The Tornado Cash currency mixer’s detained software developer reportedly has connections to Russia’s top security agency, adding another layer of scandal to an already dubious “crypto” service.

Alexey Pertsev, the 29-year-old developer of the Ethereum-based Tornado Cash protocol, was detained earlier this month by the Netherlands’ Fiscal Information and Investigation Service (FIOD) on suspicion of “involvement in concealing unlawful financial flows and enabling money laundering.” The arrest happened not long after the Office of Foreign Assets Control (OFAC) of the U.S. Treasury Department sanctioned Tornado Cash and blacklisted Ethereum addresses that used its services.

OFAC argued that a significant portion of the tokens put into Tornado Cash, valued at US$7.6 billion, were the profits of illicit activity to support its decision to impose penalties. This includes money obtained through DeFi exploits and similar means by North Korean state-sponsored hackers and other criminals attempting to launder their loot.

The majority of tokens passing through Tornado Cash, according to critics, are not tainted by any criminal ties. This is something that OFAC is allegedly ignoring. However, OFAC essentially counters that this is the point: there would be no way to remove the criminal currencies from Tornado Cash if there were no legitimate tokens entering the system. Tornado Cash allegedly “repeatedly failed to apply appropriate controls” to lessen these risks, according to OFAC. (It’s estimated that three-quarters of all Ethereum-based money laundering in the first half of this year used Tornado Cash.)

Pertsev is the founder and CEO of PepperSec Inc., a Seattle-based company with a Delaware registration that bills itself as a security consulting outfit made up of “white hat” hackers. The Token MultiSender software, which enables users to transmit tokens to “thousands of addresses” in a single transaction, is another creation attributed to PepperSec in addition to Tornado Cash.

On August 24, Kharon, a software company that offers information and analytical tools to support financial crime compliance programs, revealed that Pertsev had worked for Digital Security in 2017, a Russian organization that had been sanctioned by OFAC in 2018 for its involvement in “a project that would increase Russia’s offensive cyber capabilities for the Russian Intelligence Services.” Pertsev was reportedly working on this project in 2017.

Among these services is the Federal Security Service (FSB), the KGB of Russia’s notorious KGB. Pertsev reportedly worked for Digital Security, which OFAC claims gave “material and technological help to the FSB” as early as 2015, as an information security specialist who created smart contracts.

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According to his wife, the FSB or other similar Russian services were never “connected” with Pertsev. This week, Pertsev was informed that he would remain in pre-trial detention in the Netherlands for at least three more months as he awaits what charges if any, he will face for money laundering.

To conduct financial transactions on the Q.T., rogue states increasingly look to Ethereum as their preferred blockchain. Virgil Griffith, a former researcher with the Ethereum Foundation, was given a 63-month prison term in April for his 2019 trip to North Korea, where he gave officials instructions on how to “circumvent the current restrictions.”

The break is over

While some of these same critics nevertheless complied with the blacklisting out of fear that they too would discover the foolishness of defying federal authorities, prominent “crypto” bros like Kraken’s Jesse Powell condemned OFAC’s targeting of Tornado Cash and the associated blacklisting of Ethereum addresses that utilized the service.

Following the OFAC announcement, Circle, a member of the organization that creates the U.S. Dollar Coin stablecoin, froze a sizable amount of USDC linked to sanctioned addresses, inciting screams of outrage from the “code is law” crowd. However, Circle is a U.S.-based corporation (as is Kraken), which makes it extremely vulnerable to backlash should it be perceived as openly defying American authorities.

Tether, a competitor of Circle’s, has stated this week that it is not a U.S. person, does not operate in the United States, and does not accept U.S. citizens as customers. Tether is the largest stablecoin by market cap, but not by reserve assets. Tether then made an attempt to score some brownie points with the crypto community by asserting that it was “holding firm” and not “unilaterally freezing” USDT tokens in privately owned digital wallets associated with alleged criminal activities.

Tether, however, quickly lost its self-flattering bluster when it acknowledged that it had not yet received any direct requests from American authorities regarding Tornado-linked wallets despite the fact that it “normally complies” with such requests. To put it another way, Tether is a proud and tall device until it is asked to bend the knee, at which point it collapses like a cheap hooker who was punched in the stomach by a fat man with open sores on his face.

Of course, if blockchain-based entities want to one day leave their underground ghettos and take a permanent position in the mainstream finance sector, they shouldn’t have any trouble complying with legal requests to reduce criminal activity. But time and time again, crypto bros choose to act out in public, yelling that they want to stay at the playground all the time.

Since it was built from the ground up to work with financial authorities and within existing systems, Bitcoin SV (BSV) is essentially unique among blockchains. This allows it to avoid fruitless discussions about dismantling and replacing the financial and legal systems as we know them. Code is not law; law is law, after all. As Nicholas Weaver recently put it, those who insist otherwise will OFAC Around and Find Out.