Crypto mixing services caught up in a storm of controversy
Earlier this year, Roman Semenov, co-founder of Tornado Cash, a cryptocurrency mixing service, said it would be “technically impossible” for sanctions to be enforced against decentralized protocols.
“All we do is write code and publish it on GitHub,” Semenov told Bloomberg, referring to the Internet hosting service. “This is pretty close to the definition of free speech, so writing code can’t be illegal.”
“A Target on Your Back”
Tornado Cash has been hit by some headwinds since then, with the recent arrest of a developer and charges involving money laundering that include a group with alleged ties to North Korea.
“Do you want to put a target on your back?” David Lesperance, managing partner of immigration and tax counsel at Lesperance & Associates, said. “Then brag about the crypto firm’s ability to avoid US government or IRS sanctions.”
Last week, Dutch authorities said they had arrested a 29-year-old man from Amsterdam who is believed to be a developer for Tornado Cash.
The Dutch Tax Information and Investigation Service said in a statement that the man is “suspected of having been involved in hiding criminal cash flows and facilitating money laundering through” Tornado Cash.
The agency said it believes that Tornado Cash “has been used to hide large criminal cash flows, including from (online) thefts of cryptocurrencies (so-called cryptohacks and scams).”
The news of the arrest triggered strong reactions on social media.
“Attack on Digital Freedom”
“THE ATTACK ON TORNADO CASH IS AN ATTACK ON DIGITAL FREEDOM,” one person tweeted. “We WILL respond to the injustice of the arrest/sanction of Tornado Cash.”
“Privacy is a basic human right. Freedom of speech is a basic human right,” another person so. “You may be wondering why there has been so much fuss about Tornado Cash in the past few days. The sanctioning of the TC and the arrest of the developer is an attack on the above two rights.”
“This is completely and utterly unacceptable and must be fought in court, in lobbies in Brussels, and finally in ads to voters,” another tweet read. “It’s time to take back the mantle of privacy. Privacy isn’t evil, it’s critical for ordinary people.”
“I still struggle with the idea that invention can be a crime,” another person so.
Scroll to Continue
Laundering of 7 billion dollars in currency
On August 8, the US Treasury Department’s Office of Foreign Assets Control sanctioned Tornado Cash, saying the virtual currency mixer has been used to launder more than $7 billion in virtual currency since its creation in 2019.
This includes more than $455 million stolen by the Lazarus Group, officials said, a state-backed hacking group from the Democratic People’s Republic of Korea that was sanctioned by the United States in 2019, in the largest known virtual currency heist to date.
“Despite public assurances to the contrary, 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 fundamental measures to manage the risks,” said Brian E. Nelson, undersecretary of the organization. Treasury for Terrorism and Financial Intelligence.
Theory of non-sanctions
Officials said Tornado Cash operates on the Ethereum blockchain and facilitates anonymous transactions by obscuring their origin, destination and counterparties, with no attempt to establish their origin.
The currency mixer receives a series of transactions and mixes them together before transferring them to their individual recipients.
“While the purported purpose is to increase privacy, mixers like the Tornado are often used by illegal actors to launder funds, particularly those stolen during significant robberies,” the department said.
“With Tornado down 95% from its all-time high and its source code removed from Microsoft Corp.’s GitHub, it’s the latest blow to the ‘no sanctions’ theory of crypto,” Lesperance said. “This same theory bought former Ethereum Foundation researcher Virgil Griffith a 63-month federal prison sentence. As for the client list, guess what the founder will use as leverage during sentencing?”
Appeal to White-Hat Hackers
Griffith was sentenced to five years and three months in prison for a presentation that gave North Korea “”technical advice on the use of cryptocurrency and blockchain technology to avoid sanctions.”
Tornado Cash did not immediately respond to a request for comment sent via direct message on Twitter.
In June, crypto firm Harmony’s blockchain bridge Horizon was hacked for $100 million. Harmony said the hacker was still on the run and was using Tornado Cash to transfer money between different wallets.
While Harmony said it has the crypto address of the hacker, the company also offered the public a $1 million reward for any information about the hack on Monday and appealed directly to the white-hat hacking community for tips.
On August 2, officials said Nomad, a bridge that enables crypto holders to exchange tokens between different blockchains, was targeted by hackers. Tornado Cash was used to launder at least $7.8 million from that heist, officials said.
