Tornado Cash Bans Are A Warning Shot For Crypto – Vophs

In its pursuit of money laundering by North Korean hacker groups, the United States has brought legal charges against individuals, organizations, and even the North Korean government itself. It has frozen bank accounts, imposed sweeping sanctions, and pursued suspected money launderers in a deep net.

But the investigation into the Lazarus group, which is accused of laundering millions in stolen cryptocurrency, took an unusual turn earlier this month when the US approved a piece of blockchain-based software.

The move stunned the crypto world, which relies on the same software for legitimate money transfers. Many experts now wonder if this signals a more aggressive approach by the US toward regulating decentralized apps. And the case also raises some mind-bending questions about how one controls a piece of code that no one controls.

Tornado Cash’s relationship with the Lazarus Group

The software in question is TornadoCash, a cryptocurrency “mixer” that allows users on the Ethereum blockchain to hide the origin and recipients of their transactions. Mixer is used by crypto holders to maintain the privacy of their accounts on hyper-transparent blockchains such as Ethereum. The problem, according to the US Treasury Department, is that mixers are also a common tool for money launderers.

Tornado Cash has taken action. Over $7 billion Ethereum has been valued by around 60,000 users since its creation in December 2019. US officials say the customers include the Lazarus Group, which has been a frequent target of US sanctions. More recently, the U.S. alleges, Lazarus used the Tornado cash to launder some. $620 million In Crypto stolen from popular crypto game Axe Infinity.

The stolen coins were allegedly laundered using multiple mixer, but another was approved. Built and owned by a private company. Tornado Cash is unique among approved ones. Mixers for being open source software (anyone can copy it) that is decentralized by design (no one owns it) and exists on a globally distributed ledger (it can be destroyed Is). How do you approve it?

The Treasury Department’s Office of Foreign Assets Control (OFAC) imposes financial sanctions against individuals and companies believed to pose security threats, such as terrorists and drug traffickers. In April, OFAC added Lazarus’ three known Ethereum addresses to its sanctions list before adding Blender in May and TornadoCash on August 8.

Placement on this specially designated citizens and blocked persons list, known as the SDN list, effectively blacklists a person or business from all economic activity in the United States. Violating the restrictions by doing business with persons on the SDN list is a serious offense punishable by heavy fines or imprisonment.

But avoiding a person or company on the SDN list is one thing. TornadoCash is another thing to avoid as so many cryptos have come through its protocol at one point or another. The Washington Post reported on August 24 that prominent stablecoin operator Tether, under which Regulatory scrutiny In the past, there is No blacklisted accounts yet. Tornado is associated with cash restrictions.

A vague set of restrictions

The Treasury Department, in its press release, refers to Tornado Cash as if it is a company, which it is not. But as the Electronic Frontier Foundation, a digital rights advocacy group, wrote in a Blog post, Tornado Cash can mean many things: it’s several different versions of the software, code published on GitHub, a website, and a decentralized autonomous organization (DAO), a type of crypto collective that projects. Votes on changes and maintenance. The Treasury Department did not respond to multiple requests to clarify who or what approved what.

On August 10, Tornado was one of the developers of Cash. Arrested in the Netherlands for “concealing criminal financial flows and facilitating money laundering,” but it is unclear if the arrest is related to the announcement of US sanctions just two days earlier.

Ari Radbord, a former Treasury Department senior adviser and now leading legal and government affairs at blockchain analytics firm TRM Labs, said the vagueness of the sanctions announcement is unusual for OFAC. “This designation is unusual,” he said, because OFAC has previously been “very, very targeted—almost scalpel-like” in going after specific bad actors in the cryptoeconomy.

The confusion here creates uncertainty over any cryptocurrency that has been sent through TornadoCash, or even funds that have passed through the TornadoCash protocol at one point, said Peter Van Valkenburgh, director of research at CoinCenter. Said, a crypto-focused non-profit and advocacy group.

“The metaphor I like is this: If you’re banning an Iranian author, that’s one thing, and that means Americans aren’t allowed to buy a deal from him to buy the rights to his next novel. It’s a perfectly legitimate use of sanctions, he said. So the restrictions are like that you can say. Don’t read this book anymore.”

According to research by crypto analytics firm Chainalysis, about 23% of crypto Those who transacted through mixers in 2022 are illegal, up from 12 percent in 2021. As far as the US government is concerned, it is now unclear whether all of this money has been approved.

What is the government signaling about crypto?

Coin Center claims that OFAC “exceeded its statutory authority,” and may file suit on behalf of parties who believe the restrictions violated their due process and free speech rights. Is. CoinCenter, EFF, and other groups have expressed concern that because computer code is recognized speech, the sanctions order could have First Amendment implications.

If the approval of TornadoCash was in fact deliberate and not a confused oversight, then this could mean that the Treasury Department is signaling that decentralized software and institutions will be subject to its restrictions. efforts will not be excused, said Carlton Green, a former assistant director for international threats at OFAC who is now a partner at the law firm Crowell & Moring.

“Contrary to how some people view decentralized finance, the mere fact that you create a smart contract and you don’t stand there every day and manually process all the transactions, doesn’t mean “OFAC will exempt you from compliance if what you’ve created is being used by approved parties to launder funds and engage in nefarious activities,” Green said.

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