Tornado Cash sanctions leave industry leaders wondering what's next

Quick Take

  • The US Treasury has sanctioned the crypto mixing service Tornado Cash.
  •  Industry insiders are now speculating about the implications for the rest of the industry. 

Tornado Cash, a zero-knowledge proof-based private transaction protocol has been sanctioned by the US Treasury Department — and the development has industry leaders wondering what’s next. 

The protocol has allegedly been used to launder more than $7 billion worth of virtual currency since its creation in 2019, the Treasury said in announcing the enforcement action. That includes the more than $455 million stolen by the Lazarus Group, a state-sponsored hacker collective with ties to North Korea. 

“The US clearly will not tolerate the excuse that mixers are purely neutral services,” said David Carlisle, who oversees policy and regulatory affairs for cryptoasset compliance firm Elliptic. “If a mixer is facilitating activity on behalf of threat actors, in OFAC's (Office of Foreign Assets Control) view it is fair game for sanctions itself — simple as that.”  

Carlisle pointed out that many exchanges will likely face significant exposure to activity involving Tornado Cash and will have to be on the lookout to avoid processing prohibited transactions.  

Industry pushback

Blockchain policy advocacy group Coin Center raised constitutional concerns over the sanctioning of Tornado Cash. 

“This particular usage of OFAC raises heightened constitutional concerns because it is, again, not a ban on one non-US person’s ability to use the financial system, it is instead a ban on effectively every American’s ability to use a particular open source software tool,” Coin Center’s executive director Jerry Brito & research director Peter Van Valkenburgh wrote

Coin Center also raised concerns about how the US would enforce these types of sanctions. Due to the nature of blockchains, any American could be sent money that is associated with Tornado Cash. With no way to reject transactions, one could be in violation without any association or malintent. 

The sanctions news has many industry leaders scrambling to process the implications.  

"I didn't know you could sanction a piece of code, so like everyone else I'm playing catch-up,” said Nansen’s Andrew Thurman. 

Others were more pointed in their critiques. 

“The implications to those building privacy solutions on Ethereum may be huge because government and regulatory powers are notorious for being behind on technological innovation and not grasping it,” said Hudson Jameson, who is an independent blockchain consultant and previously worked for the Ethereum Foundation. “Privacy is important so you don't get tracked for metadata or unfairly grouped into DPRK related activities because a government can't ascertain Tornado Cash's code." 

Others had a more optimistic view.  

“Governments oppressing rights to financial freedom and privacy only further validates what we are building here, It’s natural that there will be resistance along the way. The reality is, they can sanction Tornado Cash but the smart contract will keep living on.” wrote Eric Conner, host of the Into the Ether podcast.   

Meanwhile, on Monday afternoon Circle froze the USDC funds in Tornado Cash's sanctioned wallets, and the GitHub accounts of the Tornado Cash team appeared to be suspended.  

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