“The most significant legal action that has occurred in crypto”: U.S. Treasury Sanctions Tornado Cash
It “could have absolutely gargantuan ripple effects for everything from dev liability to first amendment implications of code publication,” says crypto lawyer Collins Belton.
On August 8, the U.S. Treasury Department blacklisted the use of Tornado Cash, a currency mixer which scrambles information on the blockchain to protect owner privacy. In their press release, the U.S. Treasury alleged that Tornado Cash was used to launder more than $7 billion worth of currency since 2019. According to the release, over $455 million of the laundered money was stolen by the North Korea-sponsored hackers, Lazarus Group, which has been sanctioned by the U.S. since 2019.
Why Ban Tornado Cash?
When someone is sending or receiving cryptocurrency, a record of that transaction is permanently saved on the ‘ledger’ — or data stored in a block on the blockchain. Investigators can track public addresses with money movements to learn who that public key is associated with and how they are moving their money. These types of investigations have been able to uncover terrorist financing, whale movement, and child abuse rings. Services such as Tornado Cash obfuscate these types of transactions, providing anonymity to activity undertaken on the blockchain. While these types of mixers are also used by good actors simply seeking to secure their privacy, a recent report by Chainalysis shows that mixers are particularly appealing to cyber criminals, where “nearly 10% of all funds sent from illicit addresses are sent to mixers.”
“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,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson.
The actions against Tornado Cash follow similar sanctions imposed earlier this year on another mixer, Blender.io.
What does it mean for users?
There are far reaching implications in banning Tornado Cash. In particular, the means by which the U.S. Treasury banned Tornado Cash sets an interesting precedent for future crypto engagement, one that is almost impossible to enforce.
Tornado Cash and its associated Ethereum address was added to the Office of Foreign Asset Control (OFAC) Specially Designated Nationals (SDN) list, with whom American persons and businesses are barred from transacting with.
In practice, this means that no American persons or businesses can send or receive money from Tornado Cash addresses without violating sanctions law. But it is almost entirely unenforceable.
The OFAC list is typically used to bar Americans from transacting with terrorist groups, enemy states, or other state-sanctioned activities. This ensures that illicit groups on the list are unable to benefit from the U.S. financial system. But the sanctioning of Tornado Cash is different than any action taken in the past. Why? Because it’s a contract, not a person.
It is software that lives on the Ethereum blockchain. It is entirely decentralized, and no one person controls or enforces the contract. Left alone, it will continue to execute its code, even if the world were to end. In this way, the U.S. Treasury is not sanctioning one particular bad actor or agency. They are sanctioning a completely neutral tool, one that can be used for good and bad, like most technologies.
In the past, OFAC has sanctioned particular Bitcoin addresses — but the rationale is that behind these addresses is a person or entity that controls it and may be using it for malicious purposes. Or, the person or entity behind it is a sanctioned person. Either way, the sanction is targeted to an individual or group of individuals in violation of U.S. sanction laws. The OFAC ban of Tornado Cash is a ban on technology, not an individual or entity.
As Brito and Van Valkenburgh argued in their article on Coin Center, “all Americans who may wish to use this automated tool in order to protect their own privacy while transacting online who are having their liberty curtailed without the benefit of any due process.” Even worse, you cannot reject a transaction on the blockchain. So if an individual is sent money through Tornado Cash, even from a stranger or on accident, there is no way to reject the transaction. The individual receiving the transfer would technically be in violation of US sanctions.
There are legal and constitutional ramifications to this action. Sanctions are being used to bar Americans from spending their money how they want, and technology is being taken away because of the possibility that a law has been broken — without any due process as to if a crime has actually been committed. This is a limitation on any American who wishes to spend their money freely on a software that protects their privacy.
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