US Treasury sanctioned wallets holding USDC funds from Tornado Cash frozen by Circle.
The cryptocurrency and blockchain space continues to develop at a rapid pace with the understanding on how certain aspects work and are being developed becoming more prevalent than ever with big decisions like this being made. Tornado Cash, a zero-knowledge proof-based private transaction protocol has been sanctioned by the US Treasury Department — and the development has industry leaders wondering what’s next.
The protocol has allegedly been used to launder more than $7 billion worth of virtual currency since its creation in 2019, the Treasury said in announcing the enforcement action. That includes the more than $455 million stolen by the Lazarus Group, a state-sponsored hacker collective with ties to North Korea. “The US clearly will not tolerate the excuse that mixers are purely neutral services,” said David Carlisle, who oversees policy and regulatory affairs for cryptoasset compliance firm Elliptic. “If a mixer is facilitating activity on behalf of threat actors, in OFAC's (Office of Foreign Assets Control) view it is fair game for sanctions itself — simple as that.”
Carlisle pointed out that many exchanges will likely face significant exposure to activity involving Tornado Cash and will have to be on the lookout to avoid processing prohibited transactions. Blockchain policy advocacy group Coin Center raised constitutional concerns over the sanctioning of Tornado Cash. “This particular usage of OFAC raises heightened constitutional concerns because it is, again, not a ban on one non-US person’s ability to use the financial system, it is instead a ban on effectively every American’s ability to use a particular open source software tool,” Coin Center’s executive director Jerry Brito & research director Peter Van Valkenburgh wrote.
Coin Center also raised concerns about how the US would enforce these types of sanctions. Due to the nature of blockchains, any American could be sent money that is associated with Tornado Cash. With no way to reject transactions, one could be in violation without any association or malintent. The sanctions news has many industry leaders scrambling to process the implications. "I didn't know you could sanction a piece of code, so like everyone else I'm playing catch-up,” said Nansen’s Andrew Thurman.
Others were more pointed in their critiques. “The implications to those building privacy solutions on Ethereum may be huge because government and regulatory powers are notorious for being behind on technological innovation and not grasping it,” Hudson Jameson, Communications at Zcash. “Privacy is important so you don't get tracked for metadata or unfairly grouped into DPRK related activities because a government can't ascertain Tornado Cash's code."
Others had a more optimistic view. “Governments oppressing rights to financial freedom and privacy only further validates what we are building here, It’s natural that there will be resistance along the way. The reality is, they can sanction Tornado Cash but the smart contract will keep living on.” wrote Eric Conner, host of the Into the Ether podcast. Meanwhile, on Monday afternoon Circle froze the USDC funds in Tornado Cash's sanctioned wallets, and the GitHub accounts of the Tornado Cash team appeared to be suspended which has people starting to become confused with how the open source code development could be hurting individuals specifically.
Centre, the consortium behind the USD Coin (USDC) stablecoin, has blacklisted wallet addresses controlled by Tornado Cash following the US Treasury sanctions against the crypto mixer. Ethereum blockchain explorer data shows that Centre has stopped the movement of at least 75,000 USDC by blacklisting Tornado Cash wallets on the sanctions list. Among these addresses is Tornado Cash’s USDC pool, meaning those with USDC deposited on Tornado Cash may be unable to withdraw their funds. Circle did not detail the extent of the blacklisting in time for publication, but confirmed it had complied with the Office of Foreign Asset Control's latest measures.
"Circle is a regulated company and conforms to sanctions compliance requirements," said the firm in an email. "We have addressed the sanctions and blocked the addresses associated with OFAC’s Tornado Cash designation." The US Treasury has sanctioned Tornado Cash for allegedly helping to launder proceeds from crypto hacks for the North Korean hacking syndicate called Lazarus Group. This hacking cartel has been linked to several high-profile crypto hacks, including the attacks against the Ronin and Harmony crypto bridges.
By blacklisting the wallet addresses, Tornado Cash will no longer have access to the USDC funds in those wallets. This is because when Centre blacklists an address, the owner becomes unable to receive or transfer USDC funds on-chain from that address. The consortium does this by calling a particular function called “blacklist(address investor).” This is not the first time that Centre has blacklisted wallet addresses due to law enforcement or regulatory action. The consortium, formed by USD-issuer Circle and exchange platform Coinbase, froze about $100,000 in USDC belonging to a wallet address in July 2020. The company said the action was based on a law enforcement request. Rival stablecoin Tether has frozen 653 addresses on Ethereum over the last few years.
Beyond Circle's actions, Tornado Cash's site appears to be down. Its Github page has also disappeared in the hours since the OFAC announcement which has many people within the space keeping a close eye on what will or could be targeted next.
