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Tornado Cash Sanctions - The end of decentralized Assets?

According to the statement, Tornado Cash has been laundering cryptocurrency for cyber-criminals amounting to over $7 billion since it launched in 2019.any wallet or contracts directly linked to the cryptocurrency mixing service.

Tornado Cash isn't the first cryptocurrency mixer to see the bad side of the US treasury. However, the ban has caused an uproar in the crypto community. The main reason is that people see it as a ban on privacy and freedom of speech.

Different government organizations have been clear about where they stand with cryptocurrencies. However, the recent action on Tornado Cash brings a whole new complexity to the future of crypto-related services. Do we see the end of a decentralized crypto space? How far is the government willing to go to see blockchain technology under their control? What does this mean for the NFT space?


Table of Contents

#1 - WTF is Tornado Cash?

#2 - About Uncle Sam's Tornado Cash's Witch Hunt

#3 - Sanction Implications Can Get You in Trouble

#4 - The End of Privacy and Digital Freedom?


WTF is Tornado Cash?

Tornado Cash is a cryptocurrency mixing service that runs on the Ethereum blockchain.

The platform allows users to deposit funds into a single liquidity pool where they are 'mixed' to shake off any identifying information. The user can then withdraw their funds to a new wallet.

Platforms like Tornado Cash aim to increase privacy and anonymity by removing the ability for anyone to track your transaction history across the blockchain.


The Treasury Is Out to Stop a "Tornado"

OFAC (Office of Foreign Assets Control), a US Treasury arm responsible for enforcing sanctions against countries and individuals, on August 8, published a statement saying that it had added Tornado Cash to its list of sanctioned entities.

According to the statement, Tornado Cash has been laundering cryptocurrency for cybercriminals amounting to over $7 billion since it launched in 2019.

OFAC alleged that a state-sponsored North Korean hacking ring known as the Lazarus Group utilized Tornado Cash to launder almost $455M gained from Axie Infinity's Ronin network heist. It added that at least $7.8 million in crypto was laundered from the Nomad Attack, and over $96 million was stolen from the Harmony Bridge Hack.

So far, Tornado Cash and every ethereum wallet address and smart contract linked to the mixer have been added to the OFAC Sanctions List. Their services are now blocked from US persons. The total amount of digital assets blocked sums up to $437 million of ETH, stablecoins, and WBTC.

Since then, users have been unable to access the Tornado Cash website. The project also hadn't tweeted since Tuesday, when it announced the list of organizations and projects that have complied with the restriction.

These include the financial services provider Circle, GitHub, which deleted Tornado Cash's source code from its system, Alchemy, Infura, and the decentralized exchange dYdX, which began banning addresses related to the service. The project's Discord server has also been deleted, and there's no word about why this happened.


Sanction Implications Can Get You in Trouble

When an entity is added to OFAC's sanction list, US persons must avoid conducting "prohibited transactions" with them. The penalty for violating these rules includes fines and prison time of up to 30 years.

The department's definition of "prohibited transactions" covers "trade or financial transactions, and other dealings" involving US persons and entities on the list. However, a Twitter user known as BowTiedIguana pointed out a flaw in the definition that could implicate innocent users.

The user noted that "other dealings" is quite broad and could encompass actions such as visiting the Tornado Cash website. This means that anyone who indirectly comes in contact with anything related to the crypto mixer could face penalties.

An anonymous troll began sending tainted ETH from a blacklisted Tornado Cash crypto wallet to brands and celebrities to show how complicated the situation is. Among the recipients of 0.1ETH include Beeple, PUMA, Jimmy Fallon, Snoop Dogg, and the CEO of Coinbase, Brain Amstrong.

An even scarier scenario is the arrest of Tornado Cash’s developer by the Netherlands police. The man who developed the code for the mixer in 2012 was accused of “concealing criminal financial flows and facilitating money laundering through… Tornado Cash” by the FIOD (Fiscal Information and Investigation Service).


The End of Privacy and Digital Freedom?

Tornado Cash and similar crypto mixing services may seem odd at first. However, they do provide anonymity for many high-profile figures in the cryptocurrency industry.

Vitalik Buterin, the co-founder of Ethereum, spoke out in defense of the network after the US Treasury announced the latest sanctions. He noted that he used the platform to make donations he wanted to remain private.

Other influential crypto community members have also voiced their concern for privacy and digital freedom, especially after the arrest of the platform's developer.

Head of SecretNetwork, a blockchain that provides data privacy to dapps, Tor Bair mentioned that The arrest of a Tornado Cash developer is a "sledgehammer" and has a "chilling effect" on anyone trying to interact with the crypto mixer.

Some notable crypto attorneys have been tossing about the prospect of contesting the ruling on constitutional grounds, suggesting a far larger struggle may be on the horizon.

How far can the crypto community push back against government pressure before it becomes too much?


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