In August 2022, the Treasury Department sanctioned the Tornado Cash cryptocurrency mixer. It also applied censorship to various wallets associated with the service. As a result, the protocol and its associated smart contracts are now on a blacklist, making them illegal for all Americans.
This is the first time the government has sanctioned a piece of software, not an entity or organization involved in illegal acts. Therefore, the crypto community did not welcome the sanctions.
Many believe that the actions of the US government threaten the Dezentralisierung of cryptocurrencies. Meanwhile, the authorities allege that the measures are necessary to fight against Geldwäsche. However, this is not the first time the US government has sanctioned a cryptocurrency mixer this year.
What is Tornado Cash?
As you know, any transaction you make on networks like Bitcoin (BTC) or Ethereum (ETH) can be seen by anyone in a block explorer.
Tornado Cash is a decentralized cryptocurrency mixer which came on the market in 2019. It allows transactions to be anonymized by hiding the source or destination address of the funds. It works with ETH, Wrapped Bitcoin (WBTC), Dai (DAI), Tether (USDT), USD Coin (USDC), cDai (CDAI), and PKG token (PKG).
Their code mixes cryptocurrency from a user with a pool of another user’s cryptocurrency using zk-SNARK. Also, it’s a non-custodial service.
Users must send the funds to a kluger Vertrag to use Tornado Cash. They later receive a cryptographic note. Finally, they must submit a transaction that references their note to withdraw funds to a new address.
Why are cryptocurrency mixers like Tornado Cash necessary? Because the United Nations recognized privacy as a human right. We all have the right to financial privacy. Also, making people’s bank statements public directly affects their safety.
Sanctions to Tornado Cash
Tornado Cash caught the attention of hackers and authorities. Thus, it would make it possible to hide the origin of the funds, which in many cases were associated with computer crimes.
On August 8, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) allege that around $7 billion have been laundered using this service, including criminal funds from North Korean hackers.
However, research firm Chainalysis determined that only 10% of all transactions processed by the cryptocurrency mixer were linked to wrongdoing.
Despite this, on August 12, 2022, in Amsterdam, the authorities verhaftet Alex Barnacle, one of the founders of Tornado Cash. Obviously, the crypto community was unhappy with this arrest, as the founders of Tornado Cash only created open-source code that cybercriminals used without their consent for illegal purposes.
In early November 2022, the US Treasury expanded its argument to sanction the service. According to the agency, this cryptocurrency mixer has helped the North Korean government advance its weapons of mass destruction (WMD) and ballistic missile programs.
The problem of sanctioning software
It’s illegal for US users to interact with Tornado Cash, which can mean being in trouble if you receive funds from addresses that use the dApp. However, stopping other people from sending you crypto is impossible if they know your address.
To illustrate the absurdity of the situation, an anonymous user sent small amounts of ETH from a blacklisted address to “dirty” the addresses of many people. Celebrities and well-known characters include Jimmy Fallon, Shaquille O’Neal, Randi Zuckerberg, Logan Paul, Steve Aoki, and even the Ukraine Crypto Donation. Are they all in trouble now?
In the Bitcoin network, an unlimited amount of UTXOs (Unspent transaction output) can be blocked, but Ethereum’s full address is compromised upon receiving the contaminated funds.
According to an OFAC frequently asked questions section, these people should have a special license to carry out movements with the funds involved with Tornado Cash.
What’s the future of cryptocurrency mixers?
Although the UN recognizes privacy as a human right, it’s not an absolute right. So, the authorities can revoke this right after evaluating the necessity and proportionality of the procedure.
Thus, the US authorities have declared a pitched fight against cryptocurrency mixers. In August, Secretary of State Antony Blinken said they would go after and keep a close eye on cryptocurrency mixers.
Actually, it’s not the first time that the United States Treasury has sanctioned a cryptocurrency mixer. In May, the government acted against Blender.io, also accused of facilitating the Lazarus Group to steal cryptocurrency. The main difference with Tornado Cash is that Blender is a centralized service.
But, the practical applications of the control measures by the authorities against money laundering with cryptocurrencies are questionable. Should the US government also penalize the Internet because criminals use it to commit their crimes?
Furthermore, shouldn’t they also mark every dollar of cash involved in illicit transactions as illegal and issue special licenses to every person in contact with them?
2022 was a very eventful year in the world of cryptocurrencies, considering the FTX und Terra havoc. In this sense, in addition to cryptocurrency mixers such as Tornado Cash, maybe the authorities will also target many other services with crypto assets.
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