A tornado is seen in a field in D’arcy, Saskatchewan, Canada, June 15, 2021.
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The Treasury Department’s crackdown on Tornado Cash was designed to stop criminals. But many ordinary crypto investors with honest intentions are now at risk.
“Any US citizen must be very careful when transacting with Tornado Cash,” Ari Redbord, director of legal and government affairs at research firm TRM Labs, said in an interview. “Remember, sanctions are no-fault. Intent doesn’t matter.”
Tornado Cash is used by some people as a legitimate way to protect their privacy in the nascent crypto market. When a buyer pays for something using a crypto wallet, the recipient of the transfer has access to the buyer’s public crypto wallet, which shows their account details and history.
Using a crypto blending service like Tornado Cash masks these details by anonymizing the funds and disguising the identity of the buyer.
“There is a need for solutions that can help you cover your tracks, even if you’re not doing anything illegal,” said Tom Robinson, chief scientist at blockchain analytics firm Elliptic.
When Tornado Cash was blacklisted Thursday, the Treasury Department said it was going after criminals who have used the service to launder more than $7 billion worth of virtual currency since its launch in 2019.
While the goal of these sanctions by the Treasury Department’s Office of Foreign Assets Control (OFAC) is to prevent a state like North Korea from converting illicit cryptocurrencies into more usable traditional currencies to fund arms proliferation, the knock-on effect will be having on everyday investors is tough, experts told CNBC.
In the past, OFAC has placed cryptocurrency wallet addresses on its Specially Designated Nationals list. Now Treasury is targeting the address of a smart contract that will allow people to maintain their own privacy, according to Peter Van Valkenburgh, director of research at Coin Center, a nonprofit cryptocurrency think tank.
‘Targeting a software’
“This is fundamentally different because now you’re not targeting a specific individual who is a known terrorist or member of an enemy state,” Van Valkenburgh said. “They target software that exists on a peer-to-peer network on the Internet.”
OFAC is sort of a nuclear option when it comes to financial controls, according to Van Valkenburgh. He said it’s more commonly used to identify “a supporter of terrorism or a leader in a hostile state.”
Jake Chervinsky, head of policy at the Blockchain Association, said this action marks a departure from precedents for the US Treasury, which for years has “carefully differentiated bad actors from the neutral tools” and “technology they (and everyone else in the world) can use.”
Elliptic says there’s also a gap between the Treasury Department’s data and its own calculations. Elliptic found at least $1.5 billion in revenue was laundered from crimes like ransomware, hacks, and fraud via Tornado Cash and says the government’s $7 billion figure adds up to the total value of the Obtains crypto assets sent via Tornado Cash.
The effects are already visible. Circle, the firm behind US dollar-pegged stablecoin USDC, has allegedly frozen about $75,000 in USDC linked to Tornado, according to Dune, a crypto data aggregator.
Crypto exchange Coinbase must also prevent its customers from sending funds to Tornado Cash amid Treasury Department new ground rules.
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Redbord says crypto owners will eventually find a way to protect their identities.
“While today’s designation will affect US persons conducting legitimate transactions, they will likely find other avenues,” he said.
However, the problem for crypto users looking for an alternative mixing service is that no other has the scale of Tornado Cash, making it difficult to ensure their identities are protected.
“If nobody’s using them, it’s very easy to get past the mix and go after them,” Robinson said. “You need a big pot of liquidity there to be effective as a mixer, and it takes time to get that liquidity together and to get that usage going,” Robinson said.
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