What Happened to Tornado Cash?

Tornado Cash is a fully autonomous cryptocurrency tumbler on the Ethereum blockchain. It has seen a lot of use by those laundering cryptocurrency because it fully obfuscates the source of Ethereum. This money laundering use case led to the United States Treasury Department sanctioning the cryptocurrency tumbler on August 8, 2022.

These sanctions have led to a lot of confusion in the decentralized finance (DeFi) and cryptocurrency space. This article will explain what exactly happened to Tornado Cash in regard to the sanctions issued on it by the US Treasury Department.

What Is Tornado Cash?

Accordingly to World Coin Stats Tornado Cash is a fully open source cryptocurrency tumbler on the Ethereum blockchain. The project was launched in December 2019 but really started becoming popular in 2020. For those unaware, a cryptocurrency tumbler is a service (lines of code in this case) that mixes the cryptocurrency it receives together and then sends it out. This makes what could be tainted cryptocurrency legitimate again.

You can think of cryptocurrency tumbling as the crypto version of money laundering. Tumbling services like Tornado Cash are frequently used by those with ill-gotten cryptocurrency that want to obfuscate the source of the funds. Almost all the crypto hacked off centralized exchanges goes through a cryptocurrency tumbler as this allows it to be sold on a centralized exchange without arousing suspicion.

Here’s Why Tornado Cash Was Sanctioned

Tornado Cash was recently sanctioned by the US Treasury Department. These sanctions came down after the US alleged that North Korean government-affiliated hackers in the so-called Lazarus Group had laundered over $400 million worth of crypto through Tornado Cash. North Korea is sanctioned by the US Treasury Department, so the Treasury sanctioned Tornado Cash for assisting a sanctioned person or entity (North Korea in this case) to get around the sanctions.

Of course, this is the official reason that the US government has given for the sanctions. Another likely reason also includes that Tornado Cash has allowed many American citizens to successfully evade their taxes. The Internal Revenue Service (IRS) does not like that, so they sanctioned the entire service.

The Problems with Sanctioning Tornado Cash

There are a lot of problems with sanctioning an open-source, decentralized service like Tornado Cash. Remember, Tornado Cash is a smart contract on the Ethereum blockchain. This means that the service is nothing more than lines of code on the blockchain – it literally runs on its own with no input from anyone. There’s no centralized leadership of Tornado Cash that can be prosecuted like we have seen in the prosecution of previous crypto-tumbling services.

Despite this lack of leadership, a developer for Tornado Cash was arrested in the Netherlands. It’s disturbing if the developer was arrested for publishing open source code, but the developer may have profited from illicit activities. If they were arrested for publishing the code, then will everyone that contributed code be arrested? Could Vitalik Buterin be arrested? Computer manufacturers?

The other issue with sanctioning Tornado Cash is that since it’s on the blockchain and fully autonomous it can’t really be stopped. The smart contract will be still fulfilled if all the conditions are met for the smart contract to run. Again, it’s not a centralized company that can be shut down by federal police officers.

The main issue, however, with sanctioning Tornando Cash is that the sanctions list is meant for people – it’s not meant for software. This is the first time that software has been sanctioned by the government, which is a very bad precedent for the Treasury to set.

How the US Treasury Is Sanctioning Tornado Cash

We covered some of the problems with sanctioning Tornado Cash in the above section. These problems obviously did not stop the Treasury from sanctioning the service. So, how exactly are these sanctions being enforced?

Well, it’s currently illegal for US citizens to use Tornado Cash. Even more annoying is that US citizens are forbidden from even interacting with wallets that have interacted with Tornado Cash. Now, cryptocurrency is anonymous at its core, so this is hard to enforce on the blockchain.

However, it has become an issue for American-based decentralized finance companies like Aave that are not allowing flagged Tornado Cash wallets to interact with the protocol. Centralized exchanges also cannot accept Ether that has come from Tornado Cash.

Basically, the sanctions cannot go through the decentralized blockchain. Instead, they must come from the centralized onramps to the blockchain like centralized exchanges. DeFi protocols are in a strange situation because the protocols themselves often have American companies backing them.

Is Tornado Cash’s Website Down?

The domain for Tornado Cash was seized by the US government. Email addresses associated with the domain were also seized. It is still possible to use Tornado Cash, though. The website simply serves as an interface for the blockchain, but it is a lot more difficult to use without a website.

There have been no updates as to when Tornado Cash will find a new domain.

Can I Get in Trouble for Using Tornado Cash?

Yes, if you are an American citizen, then you can (and probably will) get in trouble for using Tornado Cash. The penalties include fines and even jail time. You can even get in trouble for receiving Ether from an account associated with Tornado Cash.

This is tracked by blockchain analysis firms like Chainalysis. Specifically, depositing funds that have interacted with Tornado Cash wallet on an American centralized exchange will likely result in problems.

The Future of Crypto

The lashing out by the government towards Tornado Cash is disturbing. For one, not everyone that used Tornado Cash was a criminal. Many people use it to hide their identity on the very public blockchain for a variety of reasons (privacy-conscious people, living in an unsafe country, celebrities, etc.).

The good news is that the government can try to limit crypto, but they can’t actually get rid of it. It has become too large. It’s similar to the internet – it started as simply connected phone lines and evolved into something much larger.

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