US Treasury Sanctions Tornado Cash | by Marc Arjoon | Aug, 2022


On August 8th 2022, the US Treasury sanctioned the cryptocurrencycurrency mixer, Tornado Cash. This is seemingly the first time the Treasury has sanctioned a piece of code (as opposed to an individual or entity) but likely not the last.

So, what is Tornado Cash?

Tornado cash is a mixing service used to hide the link between a wallet and its funds. It does this by combining users’ deposits into a pool of funds which are then sent to a seemingly random or newly created address. When mixing services like Tornado Cash aggregate funds like this, it becomes more difficult to trace where these funds came from. This obfuscation of transactions allows for greater privacy in an overwhelmingly transparent blockchain environment. Even among traditional finance (TradFi) institutions, the notion of privacy continues to fade as data becomes more valuable to the bottom line.

However, while privacy has been a mostly overlooked component of many blockchains, there are notable exceptions like Monero, Aztec and Zcash. So why hasn’t the Treasury targeted these privacy-focused networks? While there has been a systematic degradation of privacy over the past decade, this particular offensive is more about large verifiable criminal activity. Tornado Cash works too well and as a result, has been used by various hackers including Lazarus Group, a cybercrime association run by the North Korean state. Of Tornado Cash’s US $7 billion lifetime volume, it is suspected that around $1.5 billion has been laundered.

Sanctioning Tornado Cash has essentially made the protocol useless as less volume means it’s easier to track and trace the remaining activity. If Lazarus decided to use a mainstream application like Uniswap or MakerDao, they would have likely been sanctioned as well. Luckily, Tornado Cash has a compliance tool that lets one reveal their transaction history. Consequently, those who used the dApp for legitimate reasons can submit a withdrawal request to the Treasury while showing a cryptocurrencygraphically verifiable source of funds trail.

This opens an interesting conundrum within the cryptocurrency privacy arena. It’s not the principle of the privacy protocols that make them sanctionable but rather their adoption, specifically among known criminal organisations. This implies that too much success among these mixers would actually lead to their eventual demise. This could pose a problem as any competent developer can spin up a mixer and if it gains enough traction then criminals will start to use it, thereby creating a “whack-a-mole” game for regulators. Furthermore, the security practices of different networks should be heavily scrutinized as these multi-million-dollar hacks continue to bring unwanted regulatory and reputational risk to the entire space.

Crypto’s cypherpunk origins lend it a strong distaste against regulatory intrusions and as we move toward a cashless society the battle for on-chain privacy will continue.



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