Tornado Cash crackdown by Treasury punishes honest crypto investors

The Ministry of Finance’s crackdown on Tornado Cash was intended to stop criminals. But many ordinary crypto investors with honest intentions are now at risk.

“Every American person needs to be very careful when dealing with Tornado Cash,” Ari Redbord, head of legal and public affairs at research firm TRM Labs, said in an interview. “Remember that sanctions are strict liability. Intent does not 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 displays account details and history.

Using a crypto mixing service like Tornado Cash masks these details by anonymizing the funds and hiding the identity of the buyer.

“There’s a need for solutions that can help you cover your tracks, even when you’re not doing anything illegal,” said Tom Robinson, chief researcher at blockchain analytics firm Elliptic.

In blacklisting Tornado Cash on Thursday, the Treasury Department said it was going after criminals, who used the service to launder more than $7 billion in virtual currency since it launched in 2019.

Although the goal of these sanctions from the Treasury’s Office of Foreign Assets Control (OFAC) is to block a state like North Korea from converting illicit crypto assets into more usable traditional currencies to finance weapons proliferation, the knock-on effect for everyday investors will be harsh, experts told CNBC.

In the past, OFAC has placed cryptocurrency wallet addresses on its “Specially Designated Nationals list.” Now the Treasury Department is targeting the address of a smart contract that would enable people to maintain their own privacy, according to Peter Van Valkenburgh, director of research at the Coin Center, a non-profit cryptocurrency think tank.

Jake Chervinsky, head of policy at the Blockchain Association, said this action marks a departure from precedent for the US Treasury, which for years has “carefully separated bad actors from the neutral tools” and “technology that they (plus everyone else in the world) are able to use”.

Elliptic says there is also a gap between the Treasury’s data and its own calculations. Elliptic found that at least $1.5 billion in proceeds of crimes such as ransoms, hacks, and fraud have been laundered through Tornado Cash, and says the $7 billion government figure refers to the total value of crypto assets that have been sent through Tornado Cash.

The consequences are already clear. Circle, the firm behind the US dollar-pegged stablecoin USDC, has reportedly frozen around $75,000 in USDC that was linked to Tornado, according to Dune, a crypto data aggregator.

Crypto exchange Coinbase will also have to block its customers from sending funds to Tornado Cash, given the new ground rules from Treasury.

Redbord says that crypto holders will eventually find a way to protect their identity.

“While today’s designation will affect U.S. persons making legitimate transactions, they will likely find other avenues,” he said.

But the problem for crypto users looking for an alternative mixing service is that no one else has the scale of Tornado Cash, making it difficult to ensure their identity is protected.

“If nobody uses them, then it’s very easy to overcome the mix and track through them,” Robinson said. “You need a big pot of liquidity there for it to be effective as a mixer, and it takes time to get that liquidity together and get it going,” Robinson said.

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