The US Treasury has issued sanctions against cryptocurrency mixer Tornado Cash. Surprisingly, the title of the Treasury Department press release calls the mixer “notorious.”
After Blender.io, this is the second crypto mixer to be licensed, while Tornado Cash is the first decentralized mixer. The Treasury Department, run by former Fed Chairman Janet Yellen, has portrayed Tornado Cash as a money laundering vehicle responsible for laundering $7 billion worth of cryptocurrency since the service launched in 2019. I’m here.
What Do Cryptocurrency Mixers Do?
As recently pointed out in a Chainalysis report on pro-Russian groups evading US sanctions, cryptomixers anonymize transactions by mixing them with other cryptocurrencies. This way, if you deposit cryptocurrency into the liquidity pool and then withdraw it, the value remains the same, but the transfer record remains the same.
This obfuscates cryptocurrency transactions and makes them as private as physical cash. For this reason, mixers can be used to avoid tracking by international organizations or governments for tax evasion purposes.
Blender.io was first sanctioned in May this year after being connected to a North Korean hacker called the Lazarus Group.
However, Blender.io does not have any tokens or DAOs that are considered dApps like Tornado Cash.
What does “sanctions” mean?
When the Treasury Department, in coordination with the Office of Foreign Assets Control (OFAC), issues sanctions against an entity, it means that all assets within US territory will be blocked. This also applies to any U.S. citizen residing outside the U.S. who owns more than his 50% stake in the assets.
Blocks themselves include bans on transactions, funds, donations, goods, and services to property or interested parties. However, if Tornado Cash makes a concerted effort to “impose effective controls,” OFAC may reconsider its classification and remove the platform from its SDN (Specially Designated Nationals) list.
Financial privacy and cryptocurrencies
The Treasury appears to have used weaponized language to issue sanctions against Tornado Cash. Not only does the press release have the word “notorious” in its title, but it pushes the language to the limit. Sanctions describes Tornado Cash as a service that:
“It operates on the Ethereum blockchain, facilitating anonymous transactions indiscriminately by obfuscating the origin, destination, and counterparties, and does not attempt to identify the origin.”
“Promoting indiscriminately” means that Tornado Cash is an agnostic decentralized application (dApp). The same description can be used for Signal messenger as it indiscriminately encrypts and keeps communications between people private.
Similarly, since Ethereum is a public blockchain unlike Monero (XMR), Tornado Cash simply anonymizes transactions and keeps them private. In a press release, the Treasury Department acknowledged that “most cryptocurrency activities are legal,” but some are not.
The meaning is clear. The service should terminate its core functionality if there is any possibility of illegal activity. In other words, people have no right to expect financial privacy.
Case in point, in 2020, Senator Lindsey Graham introduced the Lawful Access to Encrypted Data Act. The bill would have ensured companies would decrypt data when requested by a licensed agency. Similarly, we have seen global efforts to remove financial privacy from the cryptocurrency sector.
At its core is the Financial Action Task Force (FATF). Headquartered within the OECD, the Paris-based organization has been pressuring to void DeFi from South Korea and Panama to the EU.
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How will the sanctions against Tornado Cash be enforced?
Tornado Cash was developed by Roman Semenov and is specifically designed as a decentralized app (dApp), so it cannot be controlled by third parties. When asked to cooperate with various investigations in January, he said in an interview:
“The Tornado Cash team primarily conducts research and publishes code on GitHub. All deployments, protocol changes and key decisions are made by the community through the Tornado Governance DAO and deployment ceremonies.”
In other words, Tornado Cash is unable to comply with the Treasury Department’s mandate to “impose effective controls.” This is because TORN token holders do not want to dissolve the platform’s core financial privacy services. That would collapse the value of TORN, which currently holds a market cap of $27.2 million.
It is unclear how TC’s DAO members could be identified for blocking by the same TORN tokens in circulation, with 1 million out of a total of 10 million. What could happen is that the cryptocurrency exchange will delist his TORN, but it will still remain on the decentralized exchange (DEX).
Likewise, the dApp itself cannot be removed from Ethereum. This can happen if a company removes the app from their store. For that, Ethereum itself must be shut down first.
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Do you think people have the same right to financial privacy online as they have physical cash offline? Let us know in the comments below.
About the author
Tim Fries is the co-founder of The Tokenist. he has a bachelor’s degree He holds a Bachelor of Science degree in Mechanical Engineering from the University of Michigan and the University of Chicago Booth earned his MBA from the School of Business. Tim is a Senior Associate on the investment team in RW Baird’s US Private Equity division and co-founder of Protective Technologies Capital, an investment firm that specializes in sensing, protection and control solutions.
