Tornado Cash was placed on a sanctions list by the Office of Foreign Assets Control of the U.S. Department of Treasury on August 8, 2022. The department’s justification was straightforward: Tornado Cash was operating an unlawful cryptocurrency service that made it simple for criminals to launder money. Any resident or citizen of the United States was no longer permitted to send or receive money through the service due to its blacklisting.
The project’s domain was deleted on the same day, and GitHub suspended the developers’ accounts. Web3 businesses were also kept informed since Circle, the second-largest stablecoin issuer, frozen around $75,000 in USDC from Tornado Cash’s Ethereum addresses.
However, Tornado Cash was not the sole target of the federal government’s pursuit. Additionally, they were pursuing the designers of the protocol. Alexey Pertsev, one of the protocol’s founders, was jailed in Amsterdam two days after it was blacklisted.
With that, Tornado Cash has essentially been shut down in its whole by the Department of Treasury. But why still remains a mystery. Why was Tornado Cash such a threat that the federal government used every resource at its disposal to bring it down?
The Mixing Puzzle
Anonymity is always brought up when discussing the advantages of Bitcoin as a currency and, in general, Crypto as a financial system. Bitcoin is great because it provides privacy, which traditional banking does not by design. That isn’t fully accurate, though. For instance, you have very limited privacy if you store your money in a centralized exchange like Binance or Coinbase.
Even if you store your coins at your address, on-chain analysis may allow nosy outsiders to connect the address to your true identity or track what you are doing with your money.
This would not be acceptable for those who require total financial discretion. It wasn’t long before this issue was resolved because the bitcoin industry is perhaps the most accurate representation of a free market that anyone can find.
Crypto mixing was the crypto industry’s answer to the pseudonymous dilemma. A service called “Crypto mixing” combines crypto tokens with others, making it more difficult to determine where the coin is.
The typical method for doing this is to collect funds from various sources and then distribute it at random over time. It makes it incredibly challenging for even the most determined third party to locate the funds and taint them in this way. Since both legitimate and unauthorized users of Bitcoin or Crypto can use mixing services, it is incredibly difficult to taint any cryptocurrency that comes from the mixing address.
Crypto mixers put a spanner in the works and render that notion totally absurd. As a crypto maximalist, it is simple to claim that the government is wrong to oppose these mixers. The reality, though, presents a more complex picture.
Some of the 96,000 bitcoins that were taken in 2013 after the Sheep Marketplace theft were used to buy other goods via a mixer called Bitcoin fog. Two years later, a total of 7,170 Bitcoin that had been taken from the Chinese exchange Bter.com were also cleaned up using Bitcoin fog. Through his Bitcoin mixing service Helix, Larry Dean Harmon of Ohio washed almost $300 million in stolen coins between 2014 and 2017.
To put it another way, it is obvious that these mixers are being utilized in nefarious activities, thus the government is right to be concerned about them.
What happened with Tornado Cash?
The US government has long been searching for Crypto mixers. One of the largest bitcoin mixers, Bitcoin Blender, shut down after being pursued by government enforcement. Roman Sterlingov, the creator of Bitcoin Fog, was detained by US authorities last year on suspicion of money laundering. US forces went after the Russian darknet website Hydra at the beginning of the year, and they were successful in shutting down its servers and sanctioning the website.
Tornado Cash is a Crypto mixer, however that is not the only reason for its current problems. To put it another way, it wasn’t targeted as it was just a standard Bitcoin mixing business. There was more.
A bold hack on the blockchain project Ronin Bridge, which is connected to the well-known play-to-earn game Axie Infinity, occurred in May 2022. Lazarus, a well-known North Korean cybercrime organization, was connected to the breach. Lazarus is notorious throughout cyberspace for organizing and carrying out some of the most amazing hacks the internet has ever seen. The organization used Tornado Cash to launder a significant portion of the $622 million it had earlier this year stolen.
However, that crime is only the largest in a long line of amazing money laundering schemes. Law enforcement claims that since 2019, Tornado Cash has been a tool used to launder approximately $7 billion in funds obtained illegally.
Lazarus was not the only customer of Tornado Cash. Additionally, money taken from the April 2022 Beanstalk attack, in which a hacker stole over $180 million in cryptocurrency, was laundered through the site. Tornado Cash processed all of that cash. Even more insignificant crooks have benefited from Tornado Cash’s open source generosity. The Visor Finance and Bent Finance hackers exchanged almost 350 ETH through Tornado Cash in 2021.
These all demonstrate that Tornado Cash wasn’t just a harmless open source protocol that anyone could use, at least in the eyes of law enforcement. Hackers and criminals used it frequently and in every way they could, making it one of their favorite tools. Despite public remarks advocating KYC requirements, the service has carried on with the laziest of business practices. In hindsight, this indicated that sanctions against the service were inevitable.
It’s challenging to imagine a time when government enforcement efforts will be sufficient to prevent Crypto mixing. The fact that these services have no regulatory requirements and may be used for both legal and illicit purposes means that they are not going away any time soon.