The US bans Tornado Cash, the most popular mixer in crypto space. It is a controversial decision - with far-reaching consequences. The CEO of Circle , one of the most popular stablecoins , calls it a “turning point in internet history” . Dylan LeClair, senior analyst at Bitcoin Magazine, is even more drastic. He tweeted: "The war on privacy starts now." The decision by the US authorities raises many questions - and a spotlight on a growing conflict between state regulators and parts of the crypto community.
Tornado Cash is a so-called mixer. Officially, they serve privacy. Users can send their cryptocurrencies to a pool. He mixes them up and randomly sends them back to the respective or other address, minus a small fee. In the best case, the origin of the money that has flowed can no longer be traced. Tornado Cash is the most popular platform of this type.
OFAC, an arm of the US Treasury Department, announced Monday evening, August 8, 2022: It is blacklisting the protocol, along with all crypto addresses associated with it . US citizens face criminal prosecution if they use it.
The reason: Tornado Cash is mainly used by criminals for money laundering, especially Russian and North Korean hackers. And refused to cooperate. According to OFAC, it has been more than seven billion US dollars since the platform was founded in 2019. US Secretary of State Anthony Blinken added: "Aggressive action will be taken against all mixers who launder virtual currencies for criminals".
The announcement immediately set in motion a cascade of escalating actions. Stablecoin Circle froze all USDC that interacted with Tornado Cash. Blockchain network providers Alchemy and Infura and the largest US crypto exchange block the protocol. And the largest developer platform, Github, even deleted the accounts of several Tornado Cash programmers, including its founder, Roman Semenov. He responded on Twitter with the question: "Is it now illegal to write open code software?"
According to crypto experts Jerry Brito and Peter Van Valkenburg, the US Treasury Department is breaking new ground with the decision. For the first time, instead of sanctioning a person or entity, they sanction a smart contract to use a piece of software—essentially a “robot”: “All Americans who wish to use this automated tool to protect their privacy when transacting online will have their freedom curtailed, without giving them due process."
This is how cybercriminals use blenders like Tornado Cash
It cannot be denied that in 2022, mixers have become the number one contact point in crypto for money laundering by cybercriminals. Figures from the data service provider Chainalysis prove this . With the total volume on the platform, the number of addresses involved in illegal activities also doubled. They now make up almost a quarter in total.
The bulk of this money laundering activity goes to the account of the notorious North Korean hacker group Lazarus, which steals more than a billion US dollars annually with its heists. The money will go directly to Kim Jong Un's nuclear weapons program. Lazarus used Tornado to launder money after some of the most high-profile crypto heists of the year , such as the $615 million hack on “Axie Infinity,” the largest DeFi heist in history.
Obvious false reports from the US authorities are also causing outrage and ridicule in the crypto space. OFAC simply declared all transactions ever made on Tornado Cash illegal at $7 billion. According to blockchain analytics firm Elliptic, it's $1.5 billion that's been attributed to cybercriminals. Secretary of State Anthony Blinken tweeted that Tornado Cash was operated by Lazarus itself. He later deleted it.
In addition, the platform cooperated with the authorities in May 2022 and blacklisted known illegal addresses. "Maintaining financial privacy is important to preserving our freedom, but it shouldn't come with breaking the law," the Tornado Cash Team said. And received a lot of criticism.
Financial Privacy Through Mixer
Most importantly, US authorities overlook that mixers perform an important function in the blockchain ecosystem. Normally, all transactions can be viewed by everyone. “Protecting financial privacy is important, especially for people living under repressive governments or who otherwise need the ability to conduct legal transactions anonymously,” writes Chainalysis in its study on mixers. The Russian-Canadian Ethereum founder Vitalik Buterin also explained that he used Tornado Cash for his millions in donations to Ukraine. "My intention was to protect the recipients, not myself. The Russian government knows my positions on the Ukraine issue anyway."
A DeFi developer with the Twitter handle “Foobar” referred to an old tweet from March 2022 after the decision was announced, which sums up the Tornado Cash ban dilemma: “Crypto is currently at a crossroads. Either it evolves towards a global CBDC panopticon with tighter surveillance and censorship than the current financial system. Or we can have a truly private financial system where users can choose to have different levels of transaction data sharing.”
"EU citizens are not affected by the US sanctions," tweeted Patrik Hansen of Unstoppable Finance . “But mixers will be seen as high-risk transactions under the upcoming EU regulation. It will be difficult to resolve, requires justification and must be reported to the Financial Regulator."
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