US Sanctions Crypto Mixer Tornado Cash: How Does It Affect Ethereum?

 Mixer Service Tornado Cash Blacklisted by US Treasury Department

According to the US Treasury Department, the laundered 10-figure amount includes more than $455 million stolen  by the Lazarus hacker group .

The Lazarus Group is a North Korean state-run cybercrime organization. This group was already sanctioned by the USA in 2019. In the wake of the sanction, the US Treasury Department said Tornado Cash was used to launder more than $96 million from hostile threat actor accounts.  

Brian E. Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence, highlighted in a statement that Tornado Cash has consistently ignored regulations designed to prevent the company from regularly laundering money for criminal actors. He also stated that the Treasury Department will continue to aggressively crack down on mixers who launder virtual currencies for criminals and those who help them.

Furthermore, he emphasized that while most cryptocurrency-related transactions are legal, they can also be used for illegal activities such as sanctions evasion via mixers, P2P exchanges or dark web websites. In early May 2022, the North Korean regime accused the Biden administration of staging an "anti-North Korea campaign" by misinterpreting the country's hierarchy of cyber functions. This comes after the US sanctioned a crypto exchange that had helped North Korea steal millions of dollars.

What is Tornado Cash and why did the US impose sanctions on the Mixer service?

Tornado Cash is an Ethereum mixer service that anonymizes transactions and redacts them using zkSnark's proofs and smart contracts. The mixer allows users to completely anonymize the source of their funds and the hidden on-chain activities, making the transactions nearly impossible to track. 

How will the sanctions affect DeFi? 

OFAC is the Office of Foreign Assets Control. It administers and enforces sanctions against high-profile individuals, which include major global terrorists, drug trafficking heavyweights, and the financial/political elite of certain countries deemed harmful to American interests. 

OFAC ensures that Americans cannot do business with Cuba, Iran, Iraq, North Korea, etc. without specific government approval.

OFAC maintains a list of Specially Designated Nationals and Blocked Persons (SDN list). You can view this list here .

On August 8, 2022, Tornado Cash and all Ethereum wallet addresses associated with Tornado Cash and its smart contracts were added to OFAC's SDN list. As a result, *any* US person is prohibited from engaging in any trade, financial transaction, or "other transaction" with any person, entity, or nation on the SDN list .   

Other Transactions” is quite broad. According to the government, this could also include "technical transactions such as downloading a software patch from a prohibited facility". At this time, US persons are apparently prohibited from interacting with or even visiting the Tornado website. The sanctions will result in a blanket ban on any transfer or transaction of any kind involving Tornado Cash holdings. For WBTC, USDC and USDT, we hope that issuers will take all technical measures to prevent anyone from freezing these assets. Circle USDC can be frozen at the smart contract level. 

You can see the list of banned addresses on Dune (Tornado isn't included *yet*).

Tether's USDT can also be frozen at the Ethereum smart contract level. 

WBTC is issued by BitGo. The company is based in South Dakota and New York. They must also comply with OFAC sanctions or face fines running into the millions and imprisonment for their executives. 

What does this mean for US Ethereum miners?

We're not aware of any legal precedent and we're not lawyers, but we can say it's not looking good. It seems conceivable that when a miner or validator creates (or validates) an Ethereum block containing a transaction containing one of the Ethereum addresses on the SDN list, a violation of OFAC sanctions already exists. But how exactly the follow-up is supposed to work here is still unclear at the moment. 

There is speculation that the Ethereum client software could be updated with an opt-in patch that would allow miners/validators to bypass contaminated mempool transactions to avoid violating sanctions. 

Transaction censorship is not widespread, but we could see it being done internally by major US miners/stackers.

Americans engaged in Ethereum mining or staking processes may face legal trouble – they may censor the transactions themselves or outsource them abroad. DeFi protocols outside of DEXs working with Tornado Finance could face legal troubles, as could their (US-based) team. 

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