A couple weeks ago the US government officially blacklisted a cryptocurrency “mixer” known as Tornado Cash. With national security cited as the reason, many will be sympathetic to the ban. Others, however, see the measure against Tornado as a monumental moment, marking a significant step in the “war against privacy.”
What is Tornado Cash?
Tornado Cash is a “cryptocurrency mixer.” For the purposes of explaining the point of mixers – and of Tornado Cash – let’s start with an example: Dave wants to send 1 Bitcoin to Steve.
Bitcoin, like other cryptocurrencies, is built upon a blockchain, which is an immutable ledger of all transactions that occur on its network. Bitcoin’s ledger is public, too. This means that anyone can look up any transaction made using Bitcoin and find the addresses of the wallets of both the sender and the recipient.
But what if Dave and Steve didn’t want their transaction to be public? What if they didn’t want it known that they were transacting with one another? To achieve this goal, Dave and Steve could use a cryptocurrency mixer.
How Do Cryptocurrency Mixers Work?
Let’s continue with Dave and Steve. Dave wants to send 1 BTC to Steve, but he doesn’t want public records showing that he ever transacted with Steve. With this in mind, Dave uses a cryptocurrency mixer. He sends 1 BTC (plus any fees charged by the cryptocurrency mixing service) to the mixer. Dave’s Bitcoin is mixed with cryptocurrency from other people using the same service. Finally, Steve receives 1 BTC.
If you were to look up records of transactions, you would see Dave sending 1 BTC and you would also see Steve receiving 1 BTC. You would not, however, see a clear transaction between Dave and Steve.
Note: Mixers may also send recipients larger numbers of smaller transactions. If this were the case for our example, you would not see Steve receiving 1 BTC per se, but rather Steve receiving several smaller amounts of BTC that equal 1 BTC when totaled.
The Debate about Mixers
Proponents of cryptocurrency mixers believe that financial privacy is a value that should be upheld. In the United States, the Right to Financial Privacy Act of 1978 protects financial privacy. According to a document published by the Federal Deposit Insurance Corporation, the express purpose of the act is to:
“Establish specific procedures that federal government authorities must follow in order to obtain information from a financial institution about a customer’s financial records. Generally, these requirements include obtaining subpoenas, notifying the customer of the request, and providing the customer with an opportunity to object.”
In simple terms, individuals in the United States do indeed have a right to financial privacy. As a result, the cliché perspective that people speak from when they say things like, “If you have nothing to hide, you shouldn’t need privacy,” is unfounded in a legal sense – at least in the United States.
On the other hand, financial privacy does, indeed, open the door for unlawful and immoral activity. Increased privacy leads to greater ease for criminals who wish to evade authorities. Cryptocurrency mixers are an excellent example of this effect.
Cryptocurrency Mixers and Illicit Activity
Mixers’ ability to obscure transactions makes them extremely attractive for criminals. Mixers may be used by individuals and organizations for things like money laundering, purchasing illegal products and services, and funding illicit activities. In fact, they are.
In July of 2022, Chainalysis published a report detailing the usage of cryptocurrency mixers. According to the data shared by Chainalysis, funds sent from “illicit addresses” accounted for 23% of all funds going to mixers. The data identified nine different categories of activities engaged in by illicit addresses sending cryptocurrency to mixers in the time period from early 2019 to mid-2022:
- Terrorism financing
- Stolen funds
- Cybercriminal administration
- Fraud shop
- Darknet market
- Child abuse material
What Happened with Tornado Cash?
Technically speaking, Tornado Cash was “sanctioned” by OFAC, which is the United States Department of Treasury’s Office of Foreign Asset Controls. OFAC keeps a list of “Specially Designated Nationals and Blocked Persons” known as the SDN.
According to the U.S. Department of the Treasury’s official website regarding entities appearing on the SDN, “their assets are blocked and U.S. persons are generally prohibited from dealing with them.” So while most articles referencing Tornado Cash will say that the mixer was “sanctioned,” Tornado Cash has been added to the SDN and effectively banned in the United States.
Why was Tornado Cash Banned?
The U.S. Treasury put out a press release explaining its reasons for sanctioning Tornado Cash. For convenience, here are the most significant and relevant claims made against the cryptocurrency mixer, quoted verbatim from the press release:
- Tornado Cash has been used to launder more than $7 billion worth of virtual currency since its creation in 2019.
- Some of the money laundered through Tornado Cash includes over $455 million stolen by the Lazarus Group, a Democratic People’s Republic of Korea (DPRK) state-sponsored hacking group that was sanctioned by the U.S. in 2019.
- The sanction was taken pursuant to Executive Order (E.O.) 13694, as amended, and follows OFAC’s May 6, 2022 designation of virtual currency mixer Blender.io (Blender).
Brian E. Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence, was quoted as saying,
“Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”
Does Crypto Face a “War Against Privacy?”
Since its beginnings, cryptocurrency has been associated with financial privacy and autonomy. Despite the public nature of many blockchains, cryptocurrencies have been notorious for the ways in which they are used to remain “anonymous,” for illicit purposes or otherwise. Now, the question is, “Has cryptocurrency become a target for authorities as a result of the privacy it enables?”
Was the Ban on Tornado Cash Justified?
Although Tornado Cash may have been used for illicit activity, some are arguing that OFAC “overstepped.” Proponents of this viewpoint explain that when Tornado Cash was sanctioned, OFAC treated “autonomous code as a ‘person'” and that with this in mind, the ban was unjust.
There is no current resolution to this specific conflict, but the authors of the above-linked analysis state their intentions to start a dialogue with OFAC and possibly even challenge the sanctions.
Tornado Cash’s Ban is One Event Among Many
As referenced in the U.S. Treasury’s press release about Tornado Cash, it is not the first cryptocurrency mixer to receive attention from authorities. Earlier this year, Blender.io was sanctioned; like the ban on Tornado Cash, the ban on Blender.io was explained with references to its usage by the DPRK.
DeFi Apps Began Complying with Sanctions
Shortly after the sanctions on Tornado Cash issued by OFAC, “established DeFi protocols seem to be taking a cautious approach to compliance by preemptively banning addresses that have interacted with Tornado Cash.”
Like many other aspects of this entire situation, DeFi apps banning Tornado Cash users can be looked at from a number of perspectives. Some may see it as a positive thing; by banning addresses associated with Tornado Cash, DeFi apps are showing willingness to “follow the rules.” Others, however, look on in dismay; a belief held by many is that regulatory oversight and actions are being taken against crypto in increasing measures – and that privacy is being killed as collateral damage.
The “Slippery Slope” of Banning Mixers
One of the more powerful arguments against OFAC’s sanctions of Tornado Cash is that it is punishing the service for the actions of its users. The reality is that there is an endless number of things that can be used for illegal activity that are not currently banned and – logically speaking – never should be.
Although perhaps overly simplistic, one might say, “Knives can be used for murder. Should knives be banned?”
Especially considering that the ban on Tornado Cash has been deemed questionable by many, apprehension of the future is justified for the entire cryptocurrency space. There are untold numbers of projects that cite privacy as one of their largest offerings that could be targeted next.
The Future of Privacy in Crypto
Unfortunately for many of the loudest voices speaking out against the sanctions of Tornado Cash, governmental power is unquestionable. Every year brings with it new regulations, clamping down on what is legal and permissible with cryptocurrency. While autonomy and privacy are ideals largely held by the cryptocurrency community, long-term sustainability, practicality, and legality must be considered.
Quite simply, individuals, businesses, and teams that wish to exist and thrive in the crypto space appear to find it in their best interests to comply with any regulations that pertain to them. Over the years, we’ve seen too many examples of what happens to those who fail to do so.