Explainer: What to know about crypto mixer Tornado Cash

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The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury has sanctioned the popular Ethereum coin mixing service Tornado Cash. Most crypto wallets that have interacted with the service are also sanctioned.

As justification for its action, Treasury cited $7 billion in digital assets laundered through Tornado Cash, including the funds North Korea’s Lazarus Group stole from Axie Infinity’s Ronin Bridge.

As a result of the sanction, all US persons are immediately prohibited from interacting with the protocol.

  • Within hours of the news, Tornado Cash began to block IP addresses from Europe and the US.
  • By Wednesday, all of Protos’ attempts to access Tornado Cash’s website failed.
  • GitHub has deleted its repository.
  • Circle’s USDC blacklisted all addresses associated with the protocol.
  • Crypto exchange dYdX made several adjustments to reduce its susceptibility to Treasury’s sanctions.
  • A search on GitHub revealed a few apparent forks of the protocol.
  • Some InterPlanetary File System (IPFS) mirrors are still running on Cloudflare-IPFS and Eth.link.

Members of the crypto-asset community cited some legitimate uses for a coin mixing service, including making fully private donations to the Ukrainian defense effort. Ukraine is currently defending against the Russian invasion.

Others say they have used the service to send anonymous donations to worthy causes, including scientific research.

In an apparent response to the sanction, an anonymous user has been sending transactions to prominent Ethereum wallets, including addresses controlled by Coinbase CEO Brian Armstrong, clothing brand Puma, late-night TV show host Jimmy Fallon, and a donation address for Ukraine. This anonymous user is still routing ETH through the protocol.

What is Tornado Cash’s coin mixing service?

Tornado Cash is a protocol that ‘mixes’ incoming coin deposits with the coins of other users. It charges a small fee for this service. After the mixing process is complete, users can withdraw coins that probably are not the same coins as the coins they originally deposited.

It was by far the most popular ETH mixer. Since inception, it has processed billions of dollars worth of ether.

For honest users, it would be like depositing a $100 bill in their bank account today and then going back tomorrow and withdrawing a $100 bill. Of course, the user will probably get a different bill.

US sanctions on Tornado Cash are affecting multiple crypto entities.

OFAC’s concern involves criminals using the service for money laundering. The users could be exchanging their digital coins for ones that are less likely to have been used for financial crimes.

In the news release announcing the sanction, Treasury Undersecretary for Terrorism and Financial Intelligence Brian E. Nelson criticized Tornado Cash for failing to implement adequate controls against money laundering.

Read more: A history of Bitcoin Fog, the crypto mixer that washed 6% of BTC’s supply

Brief history of Ethereum’s largest coin mixer

Co-founders Roman Semenov and Roman Storm forked the base code of privacy coin ZCash in August 2019 to create Tornado Cash.

ZCash conducted an ICO of its proprietary token, ZEC. Therefore, because Tornado Cash founders forked the core code from an existing coin, Tornado Cash also has its own coin, TORN. Predictably, TORN dropped 16% the day of OFAC’s sanction.

At first, the co-founders retained control of the protocol — and funds deposited into its mixers — in Version 1 (V1) of the protocol. They kept funds in a multi-sig wallet.

Vitalik Buterin admits to using Tornado Cash.

That changed with V2. The co-founders conducted a Trusted Setup Ceremony and an update to the smart contract on May 10, 2020. This decision turned the protocol into a perpetually self-executing code that no single party controls. Tornado Cash called it “the biggest Trusted Setup Ceremony in the world,” with 1,114 contributions.

Today, Tornado Cash’s contract currently holds 171,000 ether ($323 million).

Tornado Cash tried to improve its tarnished reputation

In response to concerns about criminal money laundering, in June 2020, Tornado Cash said that it would add a new service: an on-chain transaction “note.”

This note became tantamount to a common store receipt. It described the transactional history of funds and gave users a sense of legitimacy for their conduct, allowing them to maintain records and produce these notes to satisfy compliance inquiries. However, Tornado Cash refused to log its users’ personal information in these notes.

In the wake of the Treasury’s sanction, MakerDAO warned that it would have to take emergency measures if regulators target DAI’s important assets and contracts, some of which have interacted with Tornado Cash in the past. MakerDAO uses a significant amount of Circle’s USD Coin (USDC) to back Maker’s DAI stablecoin.

“If we get nuked by the U.S. government, we simply die,” said Maker’s Founder Rune Christensen.

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