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Crypto Mixing Service Caught Up in Storm of Controversy

Tornado Cash, a mixing service for cryptocurrencies, is being hit with government sanctions related to money laundering.
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Earlier this year, Roman Semenov, co-founder Tornado Cash, a mixing service for cryptocurrencies, said that it would be “technically impossible” for sanctions to be enforced against decentralized protocols.

“All we do is write code and publish it on GitHub,” Semenov told Bloomberg, referring to the internet hosting service. “This is pretty close to the definition of free speech so writing code cannot be illegal.”

'A Target on Your Back'

Tornado Cash has been hit by some ill winds since then, with the recent arrest of a developer and accusations involving money laundering that includes one group with alleged ties to North Korea.

“Want to put a target on your back?” David Lesperance, managing partner of immigration and tax adviser at Lesperance & Associates, said. “Then boast about crypto firm’s ability to evade US government sanctions or the IRS.”

Last week, Dutch authorities said they had arrested a 29-year-old Amsterdam man believed to be a developer for Tornado Cash.

The Netherlands’ Fiscal Information and Investigation Service said in a statement that the man is “suspected of involvement in concealing criminal financial flows and facilitating money laundering through” Tornado Cash.

The agency said it believes that Tornado Cash “has been used to conceal large-scale criminal money flows, including from (online) thefts of cryptocurrencies (so-called crypto hacks and scams).”

News of the arrest sparked strong reactions on social media.

'Attack on Digital Freedom'

"THE ATTACK ON TORNADO CASH IS AN ATTACK ON DIGITAL FREEDOM," one person tweeted. "We WILL respond to the injustice of the Tornado Cash arrest/sanction."

"Privacy is a fundamental human right. Freedom of expression is a fundamental human right," another person said. "You may wonder why there has been so much fuss on Tornado Cash in the last few days. The sanctioning of TC and the arrest of its developer is an assault on the above two rights."

"This is completely and totally unacceptable and needs to be fought in court, in lobbies in Brussels, and ultimately in ads for voters," another tweet read. "Its time to take back the mantle of privacy. Privacy isn't evil, its critical for everyday people."

"I'm still struggling with the idea that invention can be a crime," another person said.

Laundering $7 Billion in Currency

On Aug. 8, the U.S. Department of the Treasury’s Office of Foreign Assets Control sanctioned Tornado Cash, saying the virtual currency mixer has been used to launder more than $7 billion worth of virtual currency since its creation in 2019.

This includes over $455 million stolen by the Lazarus Group, officials said, a Democratic People’s Republic of Korea state-sponsored hacking group that was sanctioned by the U.S. in 2019, in the largest known virtual currency heist to date.

“Despite public assurances otherwise, 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 basic measures to address its risks," said Brian E. Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence.

'No-Sanctions' Theory

Officials said that Tornado Cash operates on the Ethereum blockchain and indiscriminately facilitates anonymous transactions by obfuscating their origin, destination, and counterparties, with no attempt to determine their origin.

The currency mixer receives a variety of transactions and mixes them together before transmitting them to their individual recipients. 

"While the purported purpose is to increase privacy, mixers like Tornado are commonly used by illicit actors to launder funds, especially those stolen during significant heists," the department said.

"With Tornado down 95% from its all-time high and its source code removed from Microsoft Corp.’s GitHub, it’s the latest blow to the 'no sanctions' theory of crypto," Lesperance said. "This same theory bought former Ethereum Foundation scientist Virgil Griffith a 63-month federal prison sentence. As for its customer list, guess what that founder will be using as leverage during sentencing?"

Appeal to White-Hat Hackers

Griffith was sentenced to five years and three months in prison for a presentation that gave North Korea ““technical advice on using cryptocurrency and blockchain technology to evade sanctions.”

Tornado Cash did not immediately respond to a request for comment sent via direct message on Twitter.

In June, crypto firm Harmony's blockchain bridge Horizon was hacked for $100 million. Harmony said that the hacker was still on the run and using Tornado Cash to transfer funds among different wallets.

While Harmony said it has the crypto address of the hacker, the company also offered the public a $1 million bounty for any intelligence on the hack on Monday and directly appealed to the white-hat hacker community to provide tips.

On Aug. 2, officials said, Nomad, a bridge that enables crypto holders to swap their tokens among different blockchains, was targeted by hackers. Tornado Cash was used to launder at least $7.8 million from this heist, officials said.