U.S. Sanctions Tornado Cash

U.S. Sanctions Tornado Cash

On August 8th, The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned the cryptocurrency mixer, Tornado Cash, which has notoriously been used to launder large sums of crypto. In fact, the Treasury’s official statement cites the hackers of the Harmony and Nomad bridges (two hacks that we covered recently here on our blog) as examples of malicious actors that used Tornado Cash to launder $98 million and $7.8 million respectively. While this has been framed as solely an anti-laundering measurement, this has many ripple effects on the future of blockchain technology. Many of the cryptocurrencies we use today are founded on the principles of privacy and freedom, and this decision goes directly against that.

What is Tornado Cash?

Tornado Cash is a privacy protocol that allows users to deposit ERC-20 tokens into a smart contract and transfer them to another address without the two addresses being publicly linked. Upon deposit, a random key is generated that another address must provide to withdraw the assets from the smart contract. The Treasury stated that over $7 billion in crypto has been laundered through Tornado Cash since its launch in 2019. However, the project’s team and proponents argue that it serves a critical role in privacy protection and has many uses beyond laundering. For example, the co-founder of Ethereum Vitalik Buterin has come out to explain his reasoning behind using Tornado Cash in the past. In Vitalik’s case, following the Russian invasion of Ukraine he wanted to donate without the Russian government knowing that he donated. A situation like this is a perfect example of individuals using the protocol not to launder money, but rather to provide a private, safe way to donate to an important cause. Additionally, many argue that this sanction is relatively pointless due to Tornado Cash not being a centralized entity but rather just smart contracts. These smart contracts will forever be on the blockchain, so if someone were to fork these contracts what would happen to users who interact with those? There is a level of complexity to these sanctions that perhaps the lawmakers who passed this supported this action do not fully understand.

Sanction Details

The Tornado Cash website along with all wallet addresses and smart contracts associated with the protocol was added to the OFAC’s SDN (Specially Designated Nationals) list. Everything on this list is illegal for any US citizen, resident, or company to interact with. Following these sanctions, we have also seen Circle the issuer of the USDC stablecoin use their blacklist function to make it so that users who have interacted with Tornado Cash using USDC can no longer send or receive this stablecoin. This is perhaps the most detrimental blow to crypto since USDC is the second most popular stablecoin in DeFi. The need for better privacy options and a truly decentralized stablecoin could not be clearer after these recent events.

FAQs

  1. What is Tornado Cash?
  2. A cryptocurrency mixer protocol. It allows for the transfer of tokens without leaving an on-chain link between the addresses.
  3. Is Tornado Cash illegal to use?
  4. Following the recent sanctions, U.S. users are banned from using this service.
  5. Can stablecoin issuers freeze funds?
  6. Yes, some stablecoin issuers like Circle or Tether have the option in their smart contracts to blacklist funds held by anyone on the blockchain.

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