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Tornado Cash vs US Law. Who’s Next?

10 August 2022 15:00, UTC
Denis Goncharenko

Tornado Cash is a decentralized privacy-focused cryptocurrency project that has recently gained popularity. However, it is now facing some legal challenges in the United States. Tornado Cash, like other mixers like AlphaBay, allows clients to hide the origin of their crypto assets when engaging in a transaction for a charge.

The assets laundered money includes $445 million taken by the Lazarus Gang, a renowned North Korean-backed group of hackers already sanctioned by the US. The United States has previously connected Lazarus to the loss of $625 million in Bitcoin from the Ronin Networks, an Ethereum-based sidechain created for the famous play-to-earn game Axie Infinity, and the theft of $100 million off Harmony's Horizon bridge. North Korea has historically employed Bitcoin theft operations such as ransomware to finance its weapons program.

The Treasury also stated that cybercriminals used Tornado Cash to launder at least $7.8 million in lost cryptocurrencies during last week's Nomad heist, in which thieves stole $100 million in crypto assets, notably Ethereum (ETH), Tether, Binance Coin, Dai, and USD coin by exploiting a minor glitch.

Concerning national security, Redbord stated that the sanctioning of Blender.io, which is relatively small than Tornado Cash, could be interpreted as a "preview" of Monday's action, in which OFAC may have implied that enterprises are allegedly laundering for felons or such republics as North Korea may violate sanctions. He said that when it comes to North Korea specifically, Tornado Cash is the go-to blending service. According to OFAC, such hacks were not simple – they posed severe national security dangers.

“They allege it's not just money laundering, but money laundering used for weapons proliferation.”

Tornado Cash, which has considerable value flowing through but is not linked with any unlawful activity, makes the new punishment noteworthy. By including the mixer on the sanctions list, all US citizens are accountable for ensuring that they do not deal with cryptocurrency traded through the site. "I think what we're seeing here from Treasuries is, if you allow a lot of criminal activity, we're going to use it against you even if there's a lot of legitimate activity, Redbord added.

The list of severe prosecutions. What’s the market reaction?

Tornado isn't the first exchange that has been in trouble with regulators for aiding criminal conduct. The US Department of Justice detained a guy in February last year who ran a similar organization named Helix for his participation in laundering $300 million.

The US Treasury also blocked cryptocurrency mixer Blender.io in May, another site utilized by the Lazarus Group to launder stolen crypto. Tornado Cash and Blender.io both look to have played a part in obscuring the digital trail of assets taken in the $625 million attack, albeit Tornado was not fined then, and the Axie-linked heist was not included in today's OFAC notification.

Indeed, the US government has warned for years that crypto mixing may be unlawful or facilitate illicit conduct. Earlier this year, former FinCEN assistant director for enforcement Alessio Evangelista urged the industry the crypto-service providers ought to be proactive in restricting transactions from "problematic" wallets rather than waiting for an OFAC designation.

The SEC lawsuit is still in its early stages, causing uncertainty for Tornado Cash. This will undoubtedly hurt the project, as the United States is one of the largest markets for cryptocurrency. The U.S. Treasury Department has sanctioned the mixer, freezing over $75,000 worth of the stablecoin USDC. The action was taken in response to the mixer's involvement in money laundering and other illicit activity. The developers of Tornado Cash have designed the protocol to be "unstoppable," meaning sanctions may not be able to halt its operation. The Treasury Department continues to monitor the mixer and could take further action if necessary.

Meanwhile, US-based crypto companies Circle and Coinbase promise to adhere to the sanctions regime and will block clients using Tornado Cash services. However, most people of the crypto industry are outraged with the decision of US authorities. It became known that an unknown person or persons made several transfers of ETH from Tornado Cash – Jimmy Fallon, Shaquille O'Neal, PUMA, Brian Armstrong, Steve Aoki, Beeple and other famous people and companies received 0.1 ETH each from anonymous transactor. The sender may have wanted to draw the attention of law enforcement to the recipients thus making a point of sanctions and prosecutions irrelevant.