Stranger things: Why U.S. sanctioned crypto mixer Tornado Cash

Something extremely unusual happened — the Tornado Cash mixer, which runs on the Ethereum smart contract, was added to the U.S. sanctions lists (OFAC’s SDN List). More than 40 USDC and ETH blockchain addresses associated with Tornado Cash were also blacklisted. Let’s explore what this means and what the effects of this decision can be.

What Happened

Sanctions struck the Tornado Cash mixer not so much for mixing cryptocurrency but mainly for the fact that “North Korean hackers Lazarus Group” allegedly laundered crypto through it. According to independent statistics, the share of this mixer began to decline noticeably in 2022, which is associated with the increased attention of U.S. government agencies, which claim that the mixer has processed about $7 billion in all its time.

Tornado Cash is a mixing service built on the Ethereum smart contract and works in conjunction with IPFS + ENS — a fully decentralized mechanism. The service is designed to anonymize cryptocurrency transactions, which is thought to be often used for criminal purposes.

The decentralized Tornado Cash service was supposedly created by developers Roman Storm, Roman Semenov and Alexei Pertsev. All are from Russia. They are also the founders of the cyber-security company PepperSec.

Since Roman Storm resides in the United States, he will surely have difficulties. Another developer, Roman Semenov, had his work account blocked on GitHub. So far, 24 hours have passed since the service was added to SDN, so it is difficult to talk about the impact of this decision.

It’s time to put our crypto tribalism aside; the crypto wars II are starting:

US Treasury puts privacy tool Tornado Cash on the sanctions list. This list is meant for people, not tech tools.

Privacy tools are for every American.

— muneeb.btc (@muneeb) August 8, 2022

Current Status

The only way that sanctions have affected the mixer seriously so far is that Circle has blacklisted USDC wallet addresses after OFAC sanctions were imposed. The service lost about $75k but continues to operate.

Circle just frozen 75,000 USDC belonging to unsuspecting Tornado users, as well as 149 USDC donated to the project. pic.twitter.com/GBS41FtZvB

— banteg (@bantg) August 8, 2022

Also, the service website (not functionally related to the service), which is hosted by Google, was shut down. Bloomberg tried to get comments from Google, but the company has so far ignored the request. 

Infura and Alchemy infrastructure platforms have blocked RPC requests to Tornado Cash, according to the latest reports. The services allow DAPPS users to interact with blockchain servers. Some commentators have linked the providers’ decision to sanctions. It is not yet clear how seriously this affected the service.

It’s happening.@infura_io and @AlchemyPlatform are now blocking RPC requests to @TornadoCash

Centralized RPC services are one of the cancers that undermine the core benefits of crypto.

As long as they dominate the market, no protocol is truly permissionless. pic.twitter.com/3TI3QmDgmD

— ノーネーム (@0xdev0) August 9, 2022

Online Controversy

In relation to the persecution of a popular mixer by the authorities, there was a discussion on Twitter, both for and against the actions of the authorities. 

The United States government wants every single cryptocurrency transaction tracked, monitored, and tied to a person.

This is the unifying theme between today’s action against Tornado Cash, actions against exchanges, actions against us, etc.

— LBRY 🚀 (@LBRYcom) August 8, 2022

Vitalik Buterin also took part in the discussion, admitting that he also used the service, which the U.S. authorities called criminal.

Some were afraid of possible prosecution and hurried to get out of ETH obtained via the service. Some users are even joking about how you can get back at other people with this dirty ETH:

Life is short, send tornado’d ETH to your ex

— Psycho (@AltcoinPsycho) August 8, 2022

Tornado Cash became the second mixer to fall under sanctions. Before that, the U.S. banned the Blender.io platform. According to officials, this is not the last ban, and we will see more sanctions against such services in the future.

For now, we can note that such actions against crypto are a completely new practice. It is also difficult to say how effective such legislative blocking against decentralized services is at all.