Tornado Cash[1] is a protocol of the ethereum blockchain that began operating in 2019 with the aim of mixing crypto assets to make transactions anonymous.
The OFAC (Office of Foreign Assets Control) of the United States sanctioned Tornado Cash on August 7 based on Executive Order (E.O.) 13694[2]. The ban follows the line already started on May 2, 2022, when OFAC punished Blender.io. In short, for this organization, the mixing protocols that generate anonymity and privacy in crypto assets can and are in fact used for illicit purposes such as laundering illicit funds generally acquired by hacking or theft.
In practice, both the Tornado.cash website and the associated Ethereum addresses have been added to the OFAC SDN list[3]. This list is intended to identify people involved in terrorism, enemy states or other sanctioned activities. The purpose of the list is that such subjects cannot benefit from the US financial system. In practice, anyone who sends or receives money related to those addresses will be violating OFAC laws.
What does it mean to register Tornado Cash on the SDN list?
Tornado is not a natural or legal person, nor is it an entity. It is a smart contract, that is, a robot, a piece of software that resides on the Ethereum blockchain. In addition, it is a decentralized protocol, that is, its authors can leave the project and the service would continue to function (this is the case of Bitcoin).
As the “Coin Center”[4] organization points out, the sanction is not so much against a person or company but against a neutral tool that can be used correctly or incorrectly like any other technology. More than punishing a specific person, with this measure of listing Tornado Cash in the SDN, ordinary people are being deprived of being able to use an automated tool to protect the privacy of their transactions. Let’s not forget that maintaining privacy is a fundamental right of any person. And financial privacy, isn’t it also something very relevant? I believe that it is a right of any citizen, which must be respected and cared for. Especially in the blockchain world where knowing the owner of a wallet means being able to know all your economic movements. Because the crypto world, as much as some deny it, is more transparent than the current opaque financial system.
The problem lies in the consequences of this measure, where many just are paying for sinners. If it was the Treasury Department’s intention to have sanctioned a group of people who maintain or promote Tornado.cash, they could have targeted them directly.
But it is that in this case, due to the nature of blockchain transactions, people outside the protocol, who have received cryptocurrencies that at some point passed through the Tornado.cash address may be, at this time, with their wallet blocked. Even without knowing that a certain payment was contaminated by tornado cash. It is also possible that someone who receives a crypto asset from a wallet on the SDN list, without even accepting or wanting it, is breaking the regulations. Something really Dantesque.
To OFAC, Tornado Cash has materially aided, sponsored, provided, or financially supported cyber activities originating from or directed by persons located, in whole or in substantial part, outside of the United States. For this reason, they consider that this tool can be a significant threat to the national security, foreign policy, economic health or financial stability of the United States.
According to OFAC data, Tornado Cash has been used to launder more than $7 billion in virtual currency since its inception in 2019. This includes more than $455 million stolen by the “Lazarus Group,” a hacking group sponsored by the state of the Democratic People’s Republic of Korea (DPRK) that was sanctioned by the United States in 2019, for the largest virtual currency theft known to date. In addition, Tornado Cash was later used to launder more than $96 million of funds from actors who robbed Harmony Bridge on June 24, 2022, and at least $7.8 million from the Nomad heist on August 2. of 2022.
The effects of the OFAC sanction have been devastating for the protocol. GitHub immediately removed the code and accounts of those associated with the protocol. Alchemy, Infura, and other node-as-a-service providers began blocking transactions associated with Tornado Cash addresses, and the Tornado Cash site was removed from the internet.
The value of the Tornado Cash token, which underpins the mixer ecosystem, is down 56%, starting the week at a high of $31.56 and ending around $12, according to CoinMarketCap[5].
However, not all have followed the guidelines imposed by OFAC. The stablecoin Tether reported that it would not freeze the addresses of sanctioned smart contracts on the Specially Designated Nationals and Blocked Persons (SDN) list of the Office of Foreign Assets Control (OFAC). Explaining the decision, Tether said: “So far, OFAC has not indicated that a stablecoin issuer is expected to freeze secondary market addresses that are published on the OFAC SDN List or are operated by individuals and entities that have been sanctioned by OFAC In addition, no United States law enforcement agency or regulator has made such a request despite our almost daily contact with United States law enforcement whose requests always provide precise details.” It should be noted that Tether is a Hong Kong-based issuer and does not hire US persons as clients or conduct business in the US, although it does voluntarily comply with certain US regulations as part of enforcement measures.
Separately, a judge in the Netherlands jailed Tornado Cash developer Alexey Pertsev pending charges. The Tax Information and Investigation Service (FIOD) reported: “On Wednesday, August 10, the FIOD arrested a 29-year-old man in Amsterdam. He is suspected of being involved in concealing criminal financial flows and facilitating money laundering by mixing cryptocurrencies through the decentralized Ethereum mixing service, Tornado Cash. Multiple arrests are not ruled out. These advanced technologies, such as decentralized organizations that can facilitate money laundering, are receiving special attention from the FIOD. Also in the domain of cryptocurrencies, FIOD stands for a secure financial Netherlands and conducts research with effect and impact. Today the suspect appears before the investigating judge.[6]”
The measure has its legal controversy. As FIOD pointed out, Tornado Cash[7], is a decentralized autonomous organization (DAO). It is not an entity, but an organization that does not have a hierarchical decision-making process, for example, a board or a president. Decisions are made based on member votes that are recorded in a programming code or smart contract. The operation of the DAO is also done by these smart contracts.
Lastly, Ethereum investors and Coinbase engineers have sued the Treasury Department over the Tornado Cash case. The plaintiffs allege that the government agency overstepped its bounds by barring all US citizens from using the privacy tool. They consider that OFAC, a body attached to the Department of the Treasury, was wrong to designate Tornado Cash, as “an open and decentralized bank… source software project that restores some privacy to Ethereum users.” Tornado Cash is not an entity, person or organization. It is a protocol.
For these people the case is serious, it is possible that this case shows a legal precedent of a government – in this case the United States – imposing sanctions on an open and publicly available software code, with implications for the cryptographic ecosystem in the years to come.
[1] https://ipfs.io/ipfs/QmU3j1B1UagFbfqgwWBu3yk1La657y8hoGoA24fG3QpPjf/
[2] https://home.treasury.gov/news/press-releases/jy0916
[3] https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20220808
[4] https://www.coincenter.org/u-s-treasury-sanction-of-privacy-tools-places-sweeping-restrictions-on-all-americans/
[5] https://decrypt.co/es/107400/criptomoneda-tornado-cash-cae-minimos-historicos-sanciones-eeuu
[6] https://www.fiod.nl/arrest-of-suspected-developer-of-tornado-cash/
[7]https://www.criptotendencias.com/actualidad/inversores-de-ethereum-e-ingenieros-de-coinbase-demandan-al-departamento-del-tesoro-por-el-caso-tornado-cash/
