Tornado Cash appears to be surviving despite the Treasury sanctions. Although the cryptosphere is rallying around the decentralized mix protocol, many commentators underestimate the long-term effects of US sanctions.
The US Treasury’s Office of Foreign Asset Control, (OFAC), designated Tornado Cash and an ecosystem of linked wallets Monday. It said that terrorists including North Korea’s Lazarus had used the platform for laundering more than $7 billion. , the project’s cofounder, was unable to access his account on GitHub. Users of the mixer were also locked out of their funds.
The crypto community has since raised an outcry and has been grieving the loss. Top crypto figures like Vitalik Buterin spoke out about Tornado Cash being used for good causes.
Other countries have attempted to minimize the negative impact of US sanctions, especially for those who are not from the US.
The amount of crypto in Tornado Cash’s privacy pool has not dropped dramatically for the moment. An bot which tracks the mixer’s 24-hour transaction volumes found that it had processed almost $3 million in transactions within the 24 hours following the OFAC announcement.
These arguments are short-sighted and underestimate the US jurisdictions’ capabilities, especially in relation to global financial institution. Most of the crypto that passes through the protocol will be converted back into fiat after it is spent. This process is dominated by the US. This is why the US sanctions regime has such an impact on traditional finance.
It’s true that non US entities can still transact, even if secondary sanctions are not in place. These transactions will be seen as risky by financial intermediaries all over the globe — which are the ones that non-US Tornado cash users will need to cash out — however. It’s possible that Tornado Cash will lose a lot of its liquidity as these entities leave.
It’s not only legitimate institutions who want to avoid OFAC designated entities.
Ari Redbord, an ex-advisor at the Treasury’s Office of Terrorism and Financial Intelligence, who leads the legal team at TRM Labs, said that even if you are an illicit actor, it is not a good idea to invest your money where the US government is shining light.
This case implicated North Korea’s Lazarus Group in the Tornado Cash project. The national security apparatus is much more aggressive than any US financial regulator.
Redbord said, “It was really terrible when we thought hackers attacked Ronin,” referring to the recent theft worth nearly $600,000,000 from Axie Infinity’s network. It became a national security concern when we discovered it was North Korea.
Although sanctions prohibit US citizens or entities based in the US from interfacing with Tornado Cash and its associated wallets, their application is much wider.
Andrew Fiernan from Chainalysis, Head of Sanction Strategy, wrote that even if you’re not a US citizen, cashing out Tornado Cash funds at a compliant cryptocurrency services subject to US jurisdiction could still result in a violation.
Smart contracts are sanctioned
Peter Van Valkenburgh from Coin Center argued that OFAC had exceeded its authority by naming an entity that is in fact a smart contract. A legal entity can be either an individual or corporation. It has the power to open bank accounts, obtain representation in court, and own property. Tornado Cash cannot do any of these things. It cannot, therefore, fight against its own name.
A mirror site can function as a smart contract — it is actually live. However, Tornado Cash’s privatization features depend on a sufficient user base. The US Treasury has taken a strong stance towards any new mixer to replace Tornado Cash. It’s difficult to imagine one growing on the same scale as Tornado Cash, especially if it is used by state actors such as the Lazarus Group.
OFAC has a lot of experience in traditional financial investigations and sanctions. This means that OFAC is familiar with the game of “whack-amole” and can quickly find shell companies and individuals who hold assets for designated actors. The Treasury appears determined to adopt a similar approach to digital finance, with more tools available to trace crypto.
Roman Semenov (co-founder of Tornado Cash) did not respond to a request for comment at publication time.