The Sanction Against Tornado Cash is Just a Beginning of Crypto Regulation

Last week, the sanction against Tornado Cash turned out to be the hottest crypto-related topic. On August 8, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) added Tornado Cash to its list of blocked nationals and persons, known as the Specially Designated Nationals (SDN), including the crypto’s website and its 45 Ethereum wallet addresses. Many retail investors might have no idea of what Tornado Cash is and why it became a sanction target.

Tornado Cash, a virtual currency mixer, is a tool that allows users to conceal the source of their funds by mixing cryptocurrency to hide the transaction path. This effectively protects the privacy of crypto holders, enabling more people to enjoy enhanced privacy while using cryptos. According to Dune Analytics, 3,497,632 ETH has been deposited to this Ethereum-based mixer. Having earned $18,526,769 in transaction fees, Tornado Cash now serves 12,243 depositors.

As for the reason behind the sanction, OFAC said that since it was founded in 2019, the company has been involved with $7 billion worth of virtual currency used for money laundering. According to OFAC, the mixer also helped North Korea’s state-run hacker group Lazarus Group evade penalties imposed by the U.S. Since the protocol is available to all, its main user group includes those with huge privacy needs like hackers. That might partly explain why U.S. regulators decided to go after this program first.

Apart from that, Tornado Cash co-founder Roman Semenov tweeted that his personal GitHub account has been suspended and that his personal repository was also closed. Subsequently, Tornado Cash’s GitHub code repository was deleted.

After the incident occurred, some started to send ETH mixed by Tornado Cash to the ENS wallet addresses of many public figures, including Brian Armstrong, Beeple, Shaq, and Jimmy Fallon, which further contaminated the list of Tornado-related addresses.

At the same time, many institutions and DeFi protocols, including Gitcoin, Infura, Alchemy, dYdX, MakerDAO, Pocket Network, Aave, Uniswap, and Kraken, also started to suspend accounts involving Tornado Cash funds. Despite the measures they took, most institutions still expressed their support for Tornado Cash.

The Tornado sanction is not over yet. On August 12, Alexey Pertsev, one of the co-founders of Tornado Cash, was arrested in the Netherlands. According to Dutch authorities, Pertsev is “suspected of involvement in concealing criminal financial flows and facilitating money laundering”. Following his arrest, Tornado Cash’s official Discord channel and DAO were both shut down.

Fortunately, Tornado Cash is a decentralized application, which means that its application can still run on the Ethereum network even if its codes were deleted. The regulatory crackdown simply meant that developers will no longer be able to keep updating the app.

Privacy is the issue that has attracted the spotlight in the controversy over the sanction. To be clear, Tornado Cash is just a tool, and although the mixer is used by criminals for money laundering, it also serves law-abiding institutions. In a nutshell, it remains doubtful whether the sanction is justified if Tornado Cash did not voluntarily provide services for criminals.

Decentralization is in itself a challenge to authority. As such, it is foreseeable that global regulators will tighten the regulation of the crypto market, and the sanction against Tornado Cash is just a start.

Finally, let’s end with a classic quote from Cypherpunks: Freedom and the Future of the Internet: “The Four Horsemen of the Info-pocalypse – child pornography, terrorism, money laundering, and The War on Some Drugs… But those are excuses — the mafia and foreign intelligence — they are excuses that people will accept to erect such a system.” Absolute privacy is an unattainable goal.

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