Experts explained what problems can be caused by interaction with sanctioned services

“Dirty” tokens. The threat of blocking the Tornado Cash mixer

10.08.2022

156

6 min

On August 8, the US Office of Foreign Assets Control (OFAC), part of the Treasury Department, put the cryptocurrency mixing service Tornado Cash on its sanctions list. In a statement, the agency says more than $7 billion has been laundered through virtual currencies since the mixer was created in 2019. While privacy advocates criticize the regulator's decision, representatives of exchanges and legal services are pushing the idea of circulating “clean” crypto assets.

Tornado Cash has more than $400 million worth of crypto assets under contract. As soon as the US Treasury Department's announcement came out, the price of the service's native token TORN fell 24%. At the time of publication, TORN is $18,41 according to the Binance exchange rate.

The Treasury Department's order came in for criticism from some members of the crypto industry. Coin Center executive director Jerry Brito wrote on the company's blog that the blocking could affect any citizen who used Tornado Cash, not just those associated with money laundering or other crimes. The statement focuses on the fact that the sanctions against the crypto mixer are surprising in that they are actually aimed at the smart contract, which “is a robot, not a person.” According to Brito, the Treasury Department's decision concerns “a tool that is neutral in character and that can be put to good or bad uses like any other technology.”

Putting the service on the sanctions list is not a unique precedent, said Andrey Tugarin, managing partner of GMT Legal. According to him, the US can sanction any company if it violates US law. As for the importance for the crypto industry, Tugarin notes the trend of actively applying existing legislation to the crypto world, recalling the recent investigation into the Coinbase exchange that was initiated by the Securities and Exchange Commission (SEC). “In the future, the number of cases of scrutiny and investigations by US government agencies in relation to the crypto sphere will only increase,” the expert believes.

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According to Tornado Cash's documentation, the service uses a decentralized protocol whose smart contracts “are deployed on the Ethereum blockchain, which makes them immutable,” and “no one, including developers, can modify or disable them.” However, the source code for Tornado Cash was removed from the GitHub service almost immediately after news of the Treasury Department's decision came out. Tornado Cash co-founder Roman Semenov also reported that his account on the platform had been blocked. On the same day, Circle, the issuer of the USDC stablecoin, froze more than 75 000 coins associated with the sanctioned mixer addresses.

Tornado Cash's website is unavailable. The project's official Twitter lists a number of services that refused to cooperate, including blockchain developer solutions provider Infura or web3 platform Alchemy. The service's official account also reposted a tweet stating that “if you had USDC deposited in Tornado you can not access it anymore even if everything you did was perfectly legit and legal.”

The media reports that someone in protest began sending small amounts of ETH from the Tornado Cash wallet to the public addresses of celebrities and well-known members of the crypto industry. Among the recipients are Coinbase exchange head Brian Armstrong, host Jimmy Kimmel, artist Beeple and others. This probably highlights how difficult it would be for the US government to fight the mixer if everyone who interacted with the cryptocurrencies passing through the mixer came under suspicion.

How dangerous is cryptocurrency from the mixer?

Currently, a number of exchanges have already developed their own policy in relation to the assets that came from the sanctioned addresses, Tugarin notes. In other words, exchanges themselves decide whether to allow such funds on their platform or not. Accordingly, for the end recipient of the cryptocurrency, if it is received from an address that has a connection with Tornado Cash, there is a risk of blocking the account. “However, in this case we are talking only about centralized big players. As for the various DeFi-projects, they may not impose tighter anti-money laundering (AML) policy compliance requirements,” the expert specifies.

Representatives of DeFi-protocols rather negatively perceived the imposition of sanctions on Tornado Cash. The head of the decentralized exchange Uniswap Hayden Adams called the arguments of the Ministry of Finance “absurd” and the imposition of sanctions on the decentralized protocol “a big freedom of speech issue and bad precedent.”

According to Maria Stankevich, Chief Business Development Officer at EXMO, “the anonymity of cryptocurrencies ends where the bridge to fiat currencies begins.” Therefore, those exchanges that have not yet introduced mandatory user verification, that do not check transactions and treat mixers well, “are walking on very thin ice.” According to Stankevich, it is simply not safe to keep funds and trade on such exchanges.

US sanctions are mandatory for individuals and entities who are US residents, but there is a risk of secondary sanctions. Fearing them and not wanting to get on the US sanctions list, many non-US companies routinely limit their work with sanctioned individuals. “A prime example is the restriction on the maximum account size imposed by some crypto exchanges and aimed at Russian residents. In this case, crypto exchanges decided to comply with EU sanctions by not being registered in EU countries,” Tugarin explains the April decisions on limits at Binance and other platforms.

Most centralized exchanges require users to undergo a “know your customer” (KYC) procedure to de-anonymize the user in order to access their services. It is likely that, in the future, major exchanges will tighten their compliance procedures to fully comply with the legislation in this area, Tugarin believes.

The EXMO representative said that the exchange uses CipherTrace's solution, whose system monitors cryptocurrency flows and assigns wallets a risk level from 1 to 10. The rating depends on whether or not funds have passed through the address that have previously been seen to be used by drug stores, terrorist organizations, scam projects or mixers. EXMO also uses “politically exposed persons” (PEP) and sanctions list monitoring systems such as Acuris. “It is very important for cryptocurrency owners to be sure that cryptocurrency is clean, which means it is important to use services that block dangerous transactions in advance,” Stankevich notes.

According to the observations of the GMT Legal representative, checking cryptocurrency for purity during exchange has already become a frequent procedure, and the average user has all the necessary and available mechanisms to conduct it.

To check the purity of a cryptocurrency, you can use AML-bot from GetBlock. The service allows you to assess the risk level of an individual transaction or a specific address, tracking any interaction of cryptocurrency with unwanted or dangerous sources. A convenient Telegram bot is available for a quick check.

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