Tornado Cash is an open-source crypto mixer that allows users to enjoy more anonymity.
The U.S. Treasury announced yesterday that it is sanctioning Tornado Cash due to its link to money laundering. According to the Treasury Department, it is cracking down on Tornado Cash, which was used to launder more than $7 billion worth of crypto.
Tornado Cash was also linked to government-backed North Korean hackers, in particular the Lazarus Group, which allegedly laundered $455 million through the service.
The problem is, Tornado Cash is not a company but open-source software, so the U.S. Treasury can’t effectively “sanction” software.
If software were to be made illegal, which simply consists of code, this could be seen as a serious threat to free speech according to privacy experts. Similar battles have been fought in the past by the cypherpunks when governments wanted to outlaw online privacy tools.
Some cypherpunks ended up mocking the government by printing software code on T-shirts or duplicating it in the form of books, pointing out that the digits replicated on the T-shirts or in books were illegal.
In the end, the cypherpunks won and in general there is a distinction between neutral software and bad actors. Peer-to-peer software like BitTorrent or TOR can be used for legitimate purposes or illicit purposes. The software itself is neutral.
The same is true for Tornado Cash, which can be used as a privacy-enhancing tool by individuals that don’t want their transaction history and balances to be transparently visible or traceable.
The U.S. Treasury “sanctioning” Tornado Cash is similar to outlawing a software like Tor or BitTorrent, regardless whether it’s being used for legitimate or illegal purposes.
Since yesterday, Tornado Wallet addresses are blacklisted. According to reports, USDC held in Tornado Cash wallets cannot be moved. This includes USDC held by legitimate users who utilized the mixing service for improved privacy.
Circle, the company behind USDC, complied with the sanctions and blacklisted USDC addresses linked to Tornado Cash. GitHub, a software repository, also caved under the sanctions and shut down Roman Semenov’s GitHub account.
Semenov is the co-founder of Tornado Cash. The official Tornado Cash website is down as well. This shows that governments can and will indeed sanction, blacklist or halt transactions if there are centralized attack vectors that can be utilized.
In the case of Tornado Cash, those attack vectors include Circle, GitHub and Tornado Cash’s website host.
How are honest investors affected by the incident? Americans are banned from using Tornado Cash and any American citizen that transacts with an address linked to Tornado Cash faces criminal prosecution.
The Office of Foreign Assets Control (OFAC), under the the Treasury’s purview, added all Tornado Cash wallet addresses to its “Specially Designated Nationals list”.
Any investor that parked funds in a Tornado Cash wallet is unable to move or withdraw funds and faces criminal charges if they attempt to. This means, all legitimate users of the services essentially lost all of their funds.
