What the U.S. Banning Tornado Cash Means for Crypto’s Future

TThe battle for financial privacy between crypto communities and the U.S government has escalated, despite government attempts to clamp down on criminals.

Tornado Cash, a cryptocurrency service, helps crypto owners to protect their anonymity through the creation of information trails that are encrypted on the blockchain. According to the Treasury Department, Americans were prohibited from using Tornado Cash on Monday. This was because it played a key role in laundering more than $7B.

The Office of Foreign Assets Control, a Treasury Dept. agency, called Tornado Cash “a significant threat to the national security” of the United States, and alleged that it has been used repeatedly by North Korean hackers to launder money from multiple million-dollar thefts.

The decision was met with fierce criticism from crypto-community members who perceive it as an act of government overreach that is incompatible with their core values, privacy and autonomy. Collins Belton is a crypto attorney. called it “arguably the most significant legal action that has occurred in crypto” and warned that it could produce “absolutely gargantuan ripple effects.”

The Treasury’s decision could end up significantly altering the way users engage with crypto. This decision also opens the door to a host of legal and rhetorical disputes between crypto-industry and U.S. government.

Hiding crime

The blockchain records every transaction made by someone sending cryptocurrency to one another. Investigators or eagle-eyed sleuths can then use this public information to follow money flows and learn about a person or company’s financial activity. To arrest hundreds of offenders, the U.S. Department of Justice traced blockchain records and shut down a website that was promoting child abuse.

This transparency has given rise to the creation of “mixing” services, which are designed to hide activity on the blockchain. A user can deposit cryptocurrency into a mixer, which uses complex cryptography to obfuscate the money’s trail and then send it to a brand new wallet address. There, users can retrieve the money and cash it out anonymously.

As cryptocurrency has exploded in usage both for legal and illegal activity, mixers have become a “go-to tool for cybercriminals,” according to a recent report from the blockchain analysis firm Chainalysis. According to the study, mixers account for nearly 10% of funds that are sent from illegal addresses. This is despite the fact that illicit activity usage has increased in 2022.

“Mixers account for a small share of the overall cryptocurrency ecosystem, but play a significant role in illicit activity,” Andrew Fierman, the head of sanctions strategy at Chainalysis, wrote to TIME in an email.

North Korea’s role

U.S. officials claim that the increase in hacker activity by North Koreans is one of the major drivers behind this rise. In April, U.S. Treasury officials accused the Lazarus Group, a hacking organization allegedly sponsored by North Korea’s government, of spearheading the $600 million hack of the popular crypto game Axie Infinity’s Ronin network. Those officials accused the North Korean government of using the hack to “generate revenue for its weapons of mass destruction and ballistic missile programs.”

Officials say that Ronin thieves used Tornado Cash for laundering the money. Officials claim that $600,000,000 was taken from Ronin to a Lazarus-controlled wallet. The money was then transferred to Tornado Cash and rinsed, one at a., via Tornado Cash. Tornado Cash developers’ attempts to block the Lazarus wallet from interacting with Tornado Cash were unsuccessful: about 18% of the total amount of Ether flowing through Tornado Cash in recent months—167,400 ETH—came from the Ronin hack, according to the blockchain analytics firm Nansen.

Ari Redbord (head of legal and government affairs at crypto regulatory startup TRM Labs) says Ronin was a significant turning point for cryptocurrency regulation. “Ronin really changed the way the U.S. government sees money laundering in the crypto space: they shifted from the idea that hacks were a financial crime to the idea that they were a true national security concern,” he says.

Redbord believes that over a billion dollars worth of North Korean laundered money has gone through Tornado Cash. The ten largest hacks committed by North Korean hackers used Tornado Cash as a means to wash those funds.

The Treasury Department put Tornado Cash wallet addresses, and any related smart contracts, on Monday. This was in accordance with the State Department policy. Americans who use those addresses may now face criminal charges.

The crypto backlash

Tornado Cash may be illegally used, but all users can legally and widely use it. “There are all kinds of reasons people want to build anonymity: I don’t want anyone looking at my credit card statements or Venmo,” Redbord says.

This week, Tornado Cash supporters have argued that the service is simply a neutral tool that can be used for good and bad: that it’s akin to virtual private networks (VPNs) or The Onion Router (TOR).

“This is a rough equivalent to sanctioning the email protocol in the early days of the internet, with the justification that email is often used to facilitate phishing attacks,” Lia Holland, the campaigns and communications director at the digital rights nonprofit Fight for the Future, wrote in a statement.

Tornado Cash can be used for many reasons. An employee paid in cryptocurrency by their employer may not wish to share all their financial information with their employer. A NFT fan who recently invested a large amount of money may be reluctant to risk being harassed or robbed.

For those living under dictatorial governments, Tornado Cash could be an option. Vitalik Buterin (the founder of Ethereum) came out to defend the service. writing on Twitter Tornado Cash was the method he used to give money to Ukrainian organizations without placing recipients organisations under more scrutiny. Tornado Cash may be used by donors of abortion funds to conceal their identity after Roe v. Wade was overturned.

There are brewing conflicts

The Treasury’s decision to ban Tornado Cash could prove to be a significant turning point for crypto in several ways. It shows just how far the U.S. government will go to try to stop crypto’s progress towards mainstream adoption. Defenders of Tornado Cash have indicated that this is an unprecedented decision in which sanctions were placed on a single piece of code and not an entire entity. Tornado Cash is not an entity, but rather a software-controlled mechanism. The possibility that this step will lead to other decentralized entities, such as smart contracts and DAOs (decentralized autonomous organisations), being in hot pursuit.

Redbord, at TRM Labs, says that the treasury’s decision reveals the U.S. government’s desire to push crypto toward more centralized systems and platforms that are easier to regulate. For example, Coinbase’s trading platform requires that every cryptocurrency wallet be linked to an identifiable human being. “This action sends a message to crypto exchanges that they need to ensure that they have compliance controls in place to stop cyber criminals from using their platforms,” Redbord says.

And major crypto companies have followed their lead. Circle, which is the largest stablecoin issuer, frozen more than $75,000 in funds that were linked to Tornado cash addresses. Github is a Microsoft-owned software development platform that deleted Tornado cash developers’ accounts.

However, crypto-lovers resist centralized attempts to manage transactions and policies. Bitcoin was founded in 2008 after the financial crash. Its early users sought an unregulated currency with global reach that could resist Wall Street’s pressures. Because crypto allows anonymized financial transactions that are not visible to authorities, many have adopted it.

Tornado Cash Defenders launched a number of ways to counter the decision over the past days. They first pointed out a logical flaw in Tornado Cash’s decision. Anyone who interacted with any Tornado Cash contracts is illegal. Individual users cannot reject incoming transactions—small amounts of cryptocurrency have been sent to prominent public wallet addresses—including those associated with Jimmy Fallon and Shaquille O’Neal—in a stunt that essentially dares the Treasury to take action upon an entire community. (Redbord, for what it’s worth, says he doubts that individuals were the target of the decision in the first place, or that OFAC will pay much attention to the campaign.)

Some prominent crypto attorneys have started to flout the idea of challenging this decision on constitutional grounds. “Banning software publication is banning speech,” Peter Van Valkenburgh, the director of research at Coin Center, said onstage at a crypto conference in Las Vegas on Monday. “Even laws that unreasonably chill speech are constitutionally suspect, and can be challenged even before enforcement.”

Crypto enthusiasts must make tough decisions as they seek a path forward. They have to decide whether or not to compromise their core values and how to stop illegal activity in systems designed to avoid oversight. For now, it seems that many in the crypto space are responding forcefully to the Treasury’s decision by taking an ideological stand. “While most people won’t ever use a service like Tornado Cash, the government’s approach represents a dangerous precedent for limiting the right of Americans to use privacy tools for legitimate and lawful reasons,” Miller Whitehouse-Levine, policy director of The DeFi Education Fund, wrote in an email to TIME. “Privacy is not—and cannot become—a crime.”

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