Introduction
The U.S. government shook the entire crypto world to its core by sanctioning Tornado Cash.
Tornado Cash’s sanction is becoming a bigger debate as USDC and other DeFi protocols like AAVE, and DYDX started banning wallet addresses that interacted with Tornado Cash.
Crypto proponents argue such actions are against the decentralized nature of cryptocurrency.
Treasury Department Allegation
The United States earlier this month imposed sanctions on virtual currency mixer Tornado Cash, accusing it of helping hackers, including from North Korea, to launder proceeds from their cyber crimes.
The Treasury Department sanctioned the crypto mixer Tornado Cash and associated Ethereum addresses were added to the OFAC (Office of Foreign Assets Control) blacklist, typically reserved for “persons involved in terrorism, enemy states, or other state-sanctioned activities and ensure that these individuals cannot get the benefit of the US financial system.”
All Americans are now forbidden from interacting with Tornado Cash.
The US Treasury Department backed the move by indicating that the Lazarus Group, a hacker group with ties to North Korea, had been using the service to launder stolen crypto (most notably, $100 million the group nabbed from the recent Harmony bridge attack).
Roughly $7.6 billion worth of crypto has indeed passed through Tornado, but only $1.5 billion of those funds were illegally made money i.e laundered. With the privacy-centric service now blacklisted, the broader crypto community is up in arms.
What is Tornado Cash?
Tornado Cash is used by some people as a legitimate way to protect their privacy in the still nascent crypto market. When a buyer pays for something using a crypto wallet, the recipient of the transfer has access to the purchaser's public crypto wallet, showing account details and history.
Using a crypto mixing service like Tornado Cash masks those details by anonymizing the funds and concealing the identity of the buyer.
Role of Tornado Cash in DeFi
Tornado Cash was built to break the link between the source and destination of a transaction. It receives different transactions and mixes them before sending the funds to their intended recipients.
Judge Denies Bail for Tornado Cash Developer Pertsev
After the U.S. announced sanctions on Tornado Cash, the Netherlands’ Fiscal Information and Investigation Service (FIOD) announced it had arrested a “suspected” Tornado Cash developer. Crypto fans and privacy advocates decried the arrest as a declaration of war on coders.
Dutch law enforcement arrested Pertsev over his suspected ties to Tornado Cash in Amsterdam on August 10.
Alexey Pertsev, the developer who was arrested for publishing open-source code for the Tornado Cash protocol earlier this month, must spend at least a further 90 days in jail, a Netherlands judge ruled.
The non-profit DeFi Education Fund reached out to the FIOD with questions about the arrest. The enforcement agency declined to verify whether the accused is 29-year-old Alexey Pertsev, but said that coding "may be punishable" if a developer writes code “for the sole purpose of committing criminal acts.”
Comments from Crypto Advocates on Twitter
We can all agree that government should crack down on criminals–and it’s not unusual for the government to sanction specific wallet addresses belonging to individuals suspected of supporting terrorist activity and other sanctionable behavior.
What makes this situation different is that Tornado Cash is not a “legal person”–as in an individual or corporation–but rather a technology tool that is used by many different kinds of people. Not only is the unprecedented crackdown irregular but it may also infringe on Americans’ constitutional rights.
CEO of Kraken said "banning an open source code that aims to protect privacy is similar to banning emails just because they can be used by criminals"
Ethereum creator Vitalik Buterin said he used tornado cash for donations to the Ukraine people during the war and he said "I used tornado cash to protect the recipient of the fund, not myself".
Privacy is foundational to a free society–and there are plenty of good reasons to remain private in transactions. “Anonymity is not a crime, and there are many legitimate reasons to seek anonymity in financial transactions.
Privacy tools are important too, for example, activists in authoritarian states where revealing financial information could get someone jailed or executed,”
After all, the government doesn't sanction the Internet when terrorists use email and Linux contributors are not sanctioned when an Android smartphone running Linux is used to plan a crime.
Tether Support Tornado Cash
Tether has not blacklisted any accounts associated with Tornado Cash.
Tether’s Chief Technology Officer, Paolo Ardoino, told the publication that Tether has yet to be approached by U.S. officials or law enforcement with a request to freeze transactions with Tornado Cash.
Bottomline
The Kraken CEO argued that among the Tornado users, there are also privacy-seeking and law-abiding consumers whose interests should not have been jeopardized.
Government should reconsider lifting the sanctions on Tornado because people like Vitalik Butterin as you Tornado for donations to charities.
Everyone in web3 knows that crypto should be regulated to curb money laundering. But the major question is, who should regulate crypto and to what extent?