Crypto community split over Treasury’s Tornado Cash sanctions

Recent US sanctions against cryptocurrency mixer Tornado Cash have sparked a debate in the crypto community about whether the ban compromises users’ ability to operate anonymously.

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

The Treasury’s decision has divided the crypto community – advocates for the service claim the sanctions infringe on 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 campaign and communications director at Fight for the Future, a digital rights 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 track by mixing their money with others on the blockchain.

Holland explained that regular transactions recorded on the blockchain are permanent, public and easily traceable, prompting investors to 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 example, she said, using mixers could protect the identities of activists in authoritarian countries where revealing their financial information could get them jailed or executed.

Holland added that the Treasury Department should focus on pursuing cybercriminals rather than sanctioning the tool they use to launder illegal proceeds.

“This is roughly equivalent to sanctioning the email protocol in the early days of the internet, on the grounds that email is often used to facilitate phishing attacks,” she said.

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

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

Meanwhile, critics of cryptomixers say they simply shouldn’t exist because they have criminal activity that often goes undetected and is harder to track.

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

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

By using mixers, “you run the risk of contaminating your legally obtained coins with other people’s illegal coins,” Daugherty said.

He added that it is 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, track or access any user’s financial information, except for law enforcement if it has probable cause to do so.

With anonymity, the identity is completely hidden, making it more difficult even for authorities to trace the transaction, Daugherty said.

“You only encourage crime by being able to create anonymity,” he added.

However, he acknowledged that developers should improve privacy on the blockchain, but not to the extent that users can be anonymous as they have been on Tornado Cash and other crypto mixers.

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

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

“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 address the risks,” said Brian Nelson, Treasury Secretary for terrorism and finance. intelligence, earlier this week.

A senior administration official told reporters on a background call that the sanctions against Tornado Cash are the latest action taken by the United States to crack down on North Korea’s ongoing illegal use of cryptocurrency.

Treasury sanctioned another crypto mixer, Blender.io, in May, alleging it was being used to launder money by hackers backed by the North Korean government.

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

In 2022, illegal addresses make up 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.