Tornado Cash Banned By US Regulators
By: @0xLayerTwo
US Regulators have taken what is arguably the biggest step they have ever taken in relation to Cryptocurrency regulation, and the step is not one that is resonating well with the American crypto community. The United States Treasury Department has banned all Americans from using Tornado Cash, a decentralized crypto-mixing service that allows users to send crypto into the protocol and withdraw it to a different address with no indication of where the crypto being withdrawn originally came from.
The official statement from the Treasury Department is as follows:
Tornado Cash has been the go-to mixer for cybercriminals looking to launder the proceeds of crime, as well as helping to enable hackers, including those currently under U.S. sanctions, to launder the proceeds of their cybercrimes by covering up the origin and transfer of this illicit virtual currency,” a senior department official said. “Since its creation back in 2019, Tornado Cash has reportedly laundered more than $7 billion worth of virtual currency.”
Tornado Cash has allegedly been regularly used by hackers such as the Lazarus Group, a North Korean hacking group tied to numerous major system exploits, including the $625 million March hack of Axie Infinity’s Ronin Network. Ronin Network said in a blog post that the FBI had linked Lazarus with the validator breach and that the Treasury Department sanctioned the funds.
Ari Redbord, head of legal and government affairs at blockchain analytics firm TRM Labs, the US Treasury Department and OFAC are not only concerned about the funds as the subject of criminal theft. According to Redbord, “what OFAC is saying is, ‘These hacks are more than hacks; they’re serious national security risks.’ It’s not just money laundering – it’s money laundering that’s going to be used for weapons proliferation.”
The national security sentiment was echoed in the official Treasury Department statement, stating:
Virtual currency mixers that assist criminals are a threat to U.S. national security. Treasury will continue to investigate the use of mixers for illicit purposes and use its authorities to respond to illicit financing risks in the virtual currency ecosystem Criminals have increased their use of anonymity-enhancing technologies, including mixers, to help hide the movement or origin of funds.
Those in the virtual currency industry play a critical role in complying with their Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) and sanctions obligations to prevent sanctioned persons and other illicit actors from exploiting virtual currency to undermine U.S foreign policy and national security interests. As part of that effort, the industry should take a risk-based approach to assess the risk associated with different virtual currency services, implement measures to mitigate risks, and address the challenges anonymizing features can present to compliance with AML/CFT obligations. As today’s action demonstrates, mixers should in general be considered as high-risk by virtual currency firms, which should only process transactions if they have appropriate controls in place to prevent mixers from being used to launder illicit proceeds.
Further, regulators are going after centralized issuers whos assets are currently being sent through Tornado Cash. The most recognizable of these is Circle and their US Backed Stable Coin, USDC.
Circle’s USDC has “blacklisted” all Ethereum addresses owned by Tornado Cash listed in the US Treasury Department’s sanction against the protocol.
The USDC “Blacklist Policy” states that when an address is “blacklisted,” it can “no longer receive USDC and all of the USDC controlled by that address is blocked and cannot be transferred on-chain.” Thus, any USDC currently held in a Tornado Cash address is now frozen indefinitely.
Eric Voorhees, famous Bitcoin Maximalist and ShapeShift CEO issued a statement urging Decentralized Lender MakerDAO to stop using USDC because of its ability to be censored by regulators.
This shines a light on the battle between centralization and decentralization. Oftentimes, people scoff at the importance of a truly decentralized network and its ability to avoid censorship. However, it is a fundamental pillar of the ethos of blockchain and days like yesterday show us why.
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