In an announcement on the 8th of August, 2022, came the ban on cryptocurrency mixer Tornado Cash by the US Department of the Treasury's Office of Foreign Assets Control (OFAC).
With the ban, the US treasury added the Tornado Cash website and a list of Ethereum addresses to its Specially Designated Nationals list. Consequently, the list bans American citizens from using it.
Additionally, the ban comes as a first for crypto regulations. This is for its role in laundering $7 billion, or 300,160 ETH, since its inception in 2019.
Before the sanctions, there was no listing of an open-source software protocol by the federal agency. The OFAC mainly targets a person or entity, not code.
About Tornado Cash
Tornado Cash is a decentralized, non-custodial protocol that promotes transaction privacy. It does so by severing the on-chain link between the sender and receiver address.
It employs a smart contract that promotes anonymity by accepting ETH and other tokens from one address and allowing users to withdraw to another.
The smart contracts function as a pool, combining all deposited assets and generating a private key. The private key is an assurance that you have completed the deposit process.
The sender can then use their private key to withdraw the deposited funds to any address.
Tornado Cash, in its making, is a collection of smart contracts. However, the name has become synonymous with a core subset of its protocols- Tornado Cash pools.
The pools function by the use of a cryptographic method, zero-knowledge proofs. These are privacy-preserving mathematical codes. They validate transactions while serving as ties to both parties at the end of a trade.
The protocols accept token deposits from one address while allowing withdrawals from another. As such, the ledger can still log a user's activity without trailing back to their entire financial history.
Tornado Cash acts as a secret bank vault. As a result, all of its pools share the same operating principle of accessing specific tokens they originally deposited. At no point do users lose ownership of their digital assets.
However, the privacy tool's mechanism can be easily exploited for illegal use, mainly washing dirty money.
Hackers exploit these trail-erasing services to conduct thefts, heists, ransomware schemes and fraud. They can also be used for other cybercrimes that include evading sanctions.
So, What Happened?
Based on the report made, Tornado Cash is a virtual currency mixer that launders the proceeds of cybercrimes, including those against victims in the US.
The statement by OFAC categorically calls the protocol a significant threat to national security. The statement states that it has been used severally by North Korean hackers to launder money from multiple million-dollar thefts.
Virtual currency mixing services, in most cases, are used to launder stolen funds. From several hacks and heists, Tornado Cash allegedly proceeds over $500 million.
Thus, its sanctioning, stipulating the freezing of any assets in the protocol.
Consequently, no one in the US can engage with Tornado Cash or any ETH wallet addresses associated with the protocol.
This can only happen with the authorization of OFAC. All US individuals are responsible for ensuring that they do not interact with crypto-transacted services through the service.
Final Thoughts
The sanctions by OFAC raise many concerns about the government's regulation steps. Some support the sanctions, while others are against them.
For those on the government's side, it is due to the concern of having to commit a crime and getting away with it.
On the other hand, some see that the sanctions are unfair as Tornado Cash and the users did not get a warning of any violation.
It discourages crypto companies from building their businesses in the country.
Thus, there is a need to have a set of rules that are fair and easy to understand.
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