US Treasury takes drastic decision and makes crypto service illegal to curb laundering

US Treasury takes drastic decision and makes crypto service illegal to curb laundering

The United States Department of the Treasury on Monday banned all Americans from using the Tornado Cash cryptocurrency mixing service.

The tool allows users to shuffle cryptocurrency transactions to hide the origin of values.

The Office of Foreign Assets Control (OFAC), the Treasury agency charged with preventing sanctions violations, has added Tornado Cash to “Specially Designated Nationals,” a list of companies, individuals, or organizations identified as a threat to country.

As a result, all US persons and entities are prohibited from interacting with Tornado Cash or any of the Ethereum wallet addresses (ETH linked to the protocol.

Tornado Cash has been used by the Lazarus Group, a North Korean hacking group that, in March of this year, may have participated in the $625 million diversion of the Ronin Network from Axie Infinity (AXS), according to the Department of US Treasury.

An on-chain analysis (which uses blockchain data) showed that tens of millions of dollars worth of cryptocurrencies stolen from Ronin passed through Tornado Cash.

OFAC had previously also sanctioned Blender.io, another mixing service that the Treasury Department claimed was used to launder profits from ransomware attacks, as well as about $20.5 million in stolen Ronin digital assets.

“Tornado Cash has been the prime mixer for cyber criminals looking to launder the proceeds of crime, as well as helping to enable hackers, including those currently under US sanctions, to launder the proceeds of their cybercrimes, obfuscating the origin and transfer of this illicit virtual currency,” said a senior Treasury official. “Since its inception in 2019, Tornado Cash has reportedly laundered over $7 billion in virtual currency.”

Ari Redbord, head of legal and government affairs at analytics firm TRM Labs, told CoinDesk that the measure is the body’s “biggest and most impactful action” in relation to cryptocurrencies to date.

Ronin hackers laundered the project’s profits through Tornado Cash at various times, according to on-chain data analysis, even after OFAC sanctioned an Ethereum address linked to the Lazarus Group that it claimed was related to the hack.

According to data from blockchain analytics firm Nansen, ETH deposits in Tornado Cash surged after Ronin was hacked earlier this year.

The average amount of ETH deposited in the protocol reached 220,000 units in May and June 2022, according to Nansen. That total was worth between $220 billion and $660 billion during that interval, data from aggregator CoinGecko shows.

Overall, about 18% of the total amount of ETH that flowed through Tornado Cash in recent months – 167,400 ETH – came from the Ronin hack, as per Nansen.

Proceeds from other hacks also passed through Tornado Cash, according to analysis by security firm Elliptic.

There were around 4,600 ETH (worth $15 million at the time) stolen from cryptocurrency exchange Crypto.com; $100 million from the bridge hack (a solution that connects different blockchains) Harmony; and even profits from the $200 million Nomad Bridge hack this month.

National security

Redbord said the Blender.io sanction, which is smaller than Tornado Cash, could be seen as a “preview” of today’s action, in which officials may have suggested entities that allegedly laundered crypto to criminals or countries like North Korea may be in danger for violating sanctions.

“When you talk about North Korea in particular, Tornado Cash has been the mixing service of choice,” he said. “What OFAC is saying is ‘these hacks are more than hacks; they are serious national security risks.’ It’s not just money laundering, it’s money laundering that will be used for weapons proliferation.”

What makes the new sanction interesting is the fact that Tornado Cash also holds a significant amount of value that is not associated with any illicit activity. But by adding the mixer to the sanctions list, the country implies that all US people are responsible for ensuring they do not interact with cryptocurrencies transacted through the service.

“I think what we’re seeing here is the Treasury saying, ‘If you allow too much illegal activity, we’re going to come after you, even if there’s a lot of legitimate activity,’” he said.

In fact, the US government has spent years warning that crypto mixers may be illegal or aid in illegal activities. Earlier this year, former associate director of enforcement at the Financial Crimes Network (FinCEN), Alessio Evangelista, told the industry that digital asset service providers must be proactive in blocking cryptocurrency wallet transactions.” problems” rather than waiting for an OFAC designation.

‘Unstoppable’

Sanctions may not stop Tornado Cash itself from operating. Co-founder Roman Semenov previously told CoinDesk that the privacy service is designed to operate without centralized control. While he and his team write and publish code, a Decentralized Autonomous Organization (DAO) needs to approve any changes before they are made.

“The protocol was specifically designed this way to be unstoppable, because it wouldn’t make much sense if some third party [como desenvolvedores] had control over him. That would be the same as if someone had control over Bitcoin (BTC) or Ethereum,” he said at the time.

Developers even went so far as to open source the entire user interface, allowing anyone to evaluate the code or protocol design.

While Tornado Cash is non-custodial, meaning users are not ceding control of their funds to the service, they can deposit funds into the smart contract in anticipation of transactions.

Semenov previously told Bloomberg News that it would be “technically impossible” for sanctions to be applied to protocols like Tornado.

The senior Treasury official spoke during a conference call that the agency would continue to monitor the mixers and could take further action if Tornado Cash continued as it is.

“Since we sanctioned the Blender.io virtual currency mixer, we have seen no evidence to suggest it remained active after this designation,” the official said.

“We believe this action will send a really critical message to the private sector about the risks associated with large-scale mixers, which are obviously designed to inhibit Tornado Cash or any sort of reconstituted version of it to continue operating.”

In Monday’s lawsuit, OFAC sanctioned the Tornado Cash donation address, the proxy address, a Gitcoin grants address (a platform where the user is paid to work on open source software), and several others, including some of USD Coin (USDC). More than 40 addresses in total have joined the sanctions list.

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