This week, the debate about user privacy and anonymity has taken a new turn. On Monday, August 8, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) placed fresh sanctions on the virtual currency mixer platform Tornado Cash.
Don't Miss Our Christmas Offers:
- Discover the latest stocks recommended by top Wall Street analysts, all in one place with Analyst Top Stocks
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
What is Tornado Cash?
By design, Tornado Cash conceals a cryptocurrency transaction’s origin, destination, and counterparties. All funds sent to the platform are deposited into a shared pool with other users’ tokens, where they are mixed. Once deposits to the platform are mixed, they can be withdrawn again while concealing identifiable information, making it attractive for criminal elements seeking to exploit the platform’s capabilities.
Per the latest statement from OFAC, the U.S. Treasury’s watchdog to counter sanction violations, Tornado Cash has joined its Specially Designated Nationals list with immediate effect. The sanctions prohibit all American nationals from dealing with the platform, and anyone caught using Tornado Cash services risks criminal penalties and charges.
Tornado Cash: Often Used for Illegal Activities
While the core purpose of Tornado Cash was to increase user privacy, malicious actors have started using the platform frequently to launder large sums, especially those stolen through hacks. Justifying the decision, a senior Treasury official explained, “Since its creation back in 2019, Tornado Cash has reportedly laundered more than $7 billion worth of virtual currency.”
At the same time, OFAC claimed that its decision to blacklist Tornado Cash was especially pertinent given that North Korea will most likely use the money currently being laundered by the Lazarus Group for weapons proliferation.
Of late, the platform has reportedly become the go-to spot for the North Korean hacking outfit Lazarus Group, which was behind the $625 million Ronin bridge hack. On-chain data reveals that millions of dollars worth of Ethereum (ETH-USD) tokens stolen from the bridge are being mixed via Tornado Cash. The protocol has also allegedly laundered proceeds from other high-profile cyberattacks, including the 4,600 Ethereum that was stolen from Crypto.com.
In the aftermath of OFAC’s decision, Tornado Cash has gone offline and seen its open-source code removed from Github. In this context, the Github team has clarified that according to existing trade laws, it must restrict users identified as Specially Designated Nationals from using the platform.
Web3 Proponents Fire Back
The Web3 community has reacted sharply to this decision, primarily because Tornado Cash aims to help individuals protect their privacy on-chain. Web3 industry leaders reiterate that privacy tools like Tornado Cash and Blender.io (which was also recently sanctioned by OFAC) are key pillars of Web3. This is because, without these solutions, users will have no option to hide their transaction history from public scrutiny, given that all on-chain transactions are easily available on publicly accessible distributed ledgers.
Manta Network privacy protocol contributor Kenny Li has voiced his dissatisfaction with the judgment. In his latest tweet, he draws the analogy of how a hammer can be used as a tool for construction and destruction. Talking about Tornado Cash, he explains, “It’s a tool that not only benefits society, but is also required for innovation. For web3, ‘critical’ is an understatement for the role of privacy.”
Expanding on the privacy element, a recent post penned by Coin Center Executive Director Jerry Brito and Director of Research Peter Van Valkenburgh points out, “It is not any specific bad actor who is being sanctioned, but instead it is all Americans who may wish to use this automated tool in order to protect their own privacy while transacting online who are having their liberty curtailed without the benefit of any due process.”
Also chiming in on the conversation was Ethereum Co-Founder Vitalik Buterin. In a reply to a tweet thread highlighting the use of Tornado Cash to prevent government tracking, especially in the wake of the conflict with Russia, he cited his own use of service to donate funds to Ukraine. “I’ll out myself as someone who has used TC to donate to this exact cause.”
It is still unclear whether the sanctions will leave a lasting impact on Tornado Cash and if it will rebound, given that it operates as a decentralized autonomous organization (DAO). Although sanctions prevent American citizens from accessing and using the platform, they don’t preclude users from other jurisdictions from employing the service.
