US Sanctions Virtual Currency Mixer Tornado Cash: What Will Be The Impact of This Crackdown?

In a major move, the US Treasury has sanctioned Tornado Cash, a virtual currency mixer, after news of money laundering of more than $7 billion cost of virtual currency since its foundation in 2019. 

Tornado Cash Blacklisted by US Treasury

Today, Treasury sanctioned virtual currency mixer Tornado Cash, which has been used to launder more than $7 billion worth of virtual currency since its creation in 2019. Virtual currency mixers that assist criminals are a threat to U.S. national security. https://t.co/x8sCXsNzUv

As per the US Treasury, the sanctioned amount contains more than $455 million robbed by the Lazarus hacking Group. Lazarus Group is a cybercrime gang operated by the North Korean state. This group was already sanctioned by the US in 2019. It was believed to be the biggest known virtual currency theft to date. Thereafter, the Treasury stated that Tornado Cash was utilized to launder more than $96 million of hostile threat actors’ accounts emanated from the June 24, Harmony Bridge Heist, and at most nominal $7.8 million from the August 2 “Nomad Heist”.  

For now, Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E Nelson, in a comment, highlighted that Tornado Cash has continually ignored and failed to inflict proper rules created to prevent it from laundering money for malicious threat actors regularly. He further stated that the Treasury will persist in aggressively following steps against mixers that launder virtual currency for threat actors and those who help them.

Additionally, he stated that most cryptocurrency movement is legal, it can be utilized for illegal activity, such as dodging the sanctions via mixers, peer-to-peer exchangers, darknet websites, and exchanges. Earlier in May 2022, the North Korean regime blamed the Biden government for staging an “anti-DPRK racket” by misinterpreting the hierarchy of the country’s cyber functions. This arrives after the US sanctioned a cryptocurrency exchange that helped Pyongyang in stealing millions of dollars.

What is Tornado Cash and Why the US has sanctioned it?

Tornado Cash is an Ethereum mixing service, which delivers non-custodial obscurity to transactions, pushing them private by utilizing zkSnarks proofs and smart contracts. It functions by splitting the on-chain on the public blockchain, between the sender and receiver addresses. The mixer can permit users to fully anonymize the source of money, and hidden on-chain activity, and add untraceability. 

The user puts the money into the smart contract, accepts a message as kind of a proof of ownership for the saved amount and the contract counts them to its list of duties. Subsequently, when the withdrawal is asked, the user enters the same message, and the smart contracts permit withdrawal to a new address, zkSnarks technology then confirms that withdrawal is done from unspent commitments, without disclosing the origin of the funds.

What will be the Imapct of sanctions on DeFi? 

The OFAC is the Office of Foreign Assets Control. They govern and execute sanctions against high-profile people including major global terrorists, drug trafficking heavyweights, and the financial/political elite of specific countries considered malicious to American interests. 

OFAC makes sure that Americans cannot lawfully conduct business with Cuba, Iran, Iraq, North Korea, etc without certain government permission.

OFAC preserves a list of Specially Designated Nationals and Blocked Persons (SDN List). You can check this list here.

On August 8, 2022 Tornado Cash and all the Ethereum wallet addresses linked with Tornado Cash and its smart contracts were added to OFAC’s SDN List. As a result, it is prohibited for *any* US individual’ to commit trade, financial transactions, or “other transactions” with any person, business, or nation on the SDN List. This now contains utilizing Tornado Cash.  

Other transactions” is quite wide. Government advice says it could contain “technical transactions such as downloading a software patch from a banned entity”. At this point, it is presumably prohibited for US individuals to check or simply visit the Tornado website. Intercepting instantly sets an across-the-board ban against transfers or transactions of any kind concerning the Tornado Cash belongings. For WBTC, USDC, and USDT we hope the issuers take all technical measures to stop anyone from moving or saving these assets. Circle’s USDC can be frozen at the smart contract level. You can visit the banned address list on Dune. Tornado isn’t added *yet*. Tether’s USDT can also be prohibited on the Ethereum smart contract level. 

WBTC is published by BitGo. Its commodities are in South Dakota and New York. They must follow OFAC sanctions or face million-dollar penalties and jail time for their execs. 

What does this mean for Ethereum miners who are US citizens?

There’s no lawful precedent we’re mindful of and we’re not attorneys but it doesn’t look pleasing. It appears conceivable that a violation of OFAC sanctions would happen if a miner or validator creates (or validates) an Ethereum block that includes a transaction containing one of the Ethereum addresses on the SDN list. Yet, how it’ll be executed is dark. 

One of the speculations is that Ethereum client software might be updated with an opt-in patch letting miners/validators flout contaminated mempool transactions to bypass breaching sanctions. Transaction censorship isn’t widespread but we could witness this being accomplished in-house by big US miners / stakers.

It may be a crapshoot for any US-based capital invested in Ethereum proof of stake as voting for blocks including illicit transactions could be an unlawful exercise. We hope either technical countermeasures (voluntary ban) or moving business outside US jurisdiction.

To summarize, the US is ready to utilize its most elevated level of economic sanctions generally dedicated to foreign powers and incredibly destructive people against a privacy development in crypto. If you are a US individual, any dealings with Tornado Cash are presumably illegal – such as Gitcoin grants, functioning for the project, operating or downloading its software, visiting its website, and saving/withdrawing from smart contracts. 

All assets in Tornado as of August 8th are corrupted. Tether, Circle, and BitGo will decline to bail these tokens. It is possible that the tokens will be withdrawn from Tornado anyhow and dumped into liquidity pools. Liquidity providers will be renounced carrying the bag. There is a remote risk of DEX collections for these toxic assets being blacklisted in their totality out of an abundance of warnings by the issuers (Circle, Tether, BitGo).

US individuals operating Ethereum mining or staking processes are perhaps in legal trouble – these companies may self-censor transactions or move offshore. The DeFi protocols outside DEX which communicate with Tornado’d finance may be in legal trouble, as may be their (US-based) team 

Conclusion

Ultimately, if you are a US individual with cash in Tornado: don’t violate the law, the funds aren’t worth it.