Crypto community split on Treasury’s Tornado Cash sanctions

·5 min read

Recent U.S. sanctions against cryptocurrency mixer Tornado Cash have sparked a debate within the crypto community on whether the ban compromises users’ ability to operate anonymously.

Earlier this week, the Treasury Department imposed sanctions against Tornado Cash for helping hackers launder over $7 billion worth of virtual currency. The agency said the mixer service allowed cyber criminal groups, including North Korean-backed hackers, to use its platform to launder the proceeds of cyber crimes.

The Treasury’s decision has the crypto community split — proponents of the service argue that the sanctions violate their right to privacy, while critics say the ban is a way to discourage criminals from using the platform to hide and launder illicit funds.

“In an effort to punish hackers and cybercriminals, Treasury just made a clumsy attempt to sanction Tornado Cash, an open source protocol,” wrote Lia Holland, the campaigns and communications director at Fight for the Future, a digital rights advocacy group.

Cryptocurrency mixers like Tornado Cash have become popular in recent years as crypto investors turned to the service to make their transactions anonymous and harder to trace by mixing their funds with others on the blockchain.

Holland explained that regular transactions recorded on the blockchain are permanent, public and easily traceable, which made investors turn to mixers for better privacy.

“Anonymity is not a crime, and there are many legitimate reasons to seek anonymity in financial transactions,” Holland said.

For instance, she said using mixers could protect the identity of activists in authoritarian countries where exposing their financial information could get them imprisoned or executed.

Holland added that the Treasury should focus on pursuing cyber criminals instead of sanctioning the tool they use to launder illicit proceeds.

“This is a rough equivalent to sanctioning the email protocol in the early days of the internet, with the justification that email is often used to facilitate phishing attacks,” she said.

Jake Chervinsky, head of policy at the Blockchain Association, recently said on Twitter that the sanctions may have opened a Pandora’s box, alluding to the potential for similar bans in the future.

“There’s good reason why sanctions have always applied to entities, not technology,” Chervinsky said. “Treating Tornado Cash as an ‘entity’ makes little sense.”

Meanwhile, critics of crypto mixers say they simply shouldn’t exist because they harbor criminal activity that often goes undetected and is harder to trace.

“I look at [the sanctions] as a way to prevent some of those incentives for people to commit these types of crimes against enterprises,” said Bryan Daugherty, a certified cryptocurrency investigator and the public policy director at the Bitcoin Association.

Daugherty added that crypto mixers are often used by criminal groups to obfuscate illicit funds and doesn’t see why non-criminal users would want to run the risk of using the same platform other than being anonymous.

By using mixers, “you will run the risk of contaminating your legally-gained coins with somebody else’s illegally-gained coins,” Daugherty said.

He added that it’s important to distinguish between privacy and anonymity in this context.

He argued that investors should be able to operate with privacy on the blockchain where the public cannot identify, trace or access any users’ financial information, except for law enforcement if it has probable cause to do so.

In the case of anonymity, the identity is completely hidden, which makes it harder even for the government to trace the transaction, Daugherty said.

“You’re just incentivizing crime by being able to create anonymity,” he added.

However, he did acknowledge that developers should improve privacy on the blockchain but not to the extent of allowing users to be anonymous like they have been on Tornado Cash and other crypto mixers.

In Monday’s announcement, the Treasury Department said that the Lazarus Group, a state-sponsored hacking group tied to North Korea, used Tornado Cash to steal more than $455 million in cryptocurrency, the largest known virtual currency theft to date. The U.S. sanctioned the group in 2019.

The agency also disclosed that Tornado Cash was used to launder more than $96 million of illicit cyber funds originating from the Harmony bridge heist, and at least $7.8 million from the Nomad crypto theft.

“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,” said Brian Nelson, Treasury’s undersecretary for terrorism and financial intelligence, earlier this week.

A senior administration official said during a background call to reporters that the sanctions against Tornado Cash are the latest action the U.S. has taken to crack down on North Korea’s ongoing illicit use of cryptocurrency.

Treasury sanctioned another crypto mixer, Blender.io, in May, alleging that it was used to launder money from hackers backed by North Korea’s government.

recent report from Chainalysis, a blockchain data firm, found that the use of crypto mixers reached an all-time high in 2022, with state-sponsored actors and cybercriminals making up a large portion of users.

In 2022, illicit addresses account for 23 percent of funds sent to mixers, up from 12 percent in 2021, the report found.

“Overall, if we label cybercriminal organizations with known nation state affiliations, we can see that these groups make up a significant and growing share of all illicit cryptocurrency sent to mixers,” the report said.

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