In an update to its sanctions list, the United States Treasury Department has listed an Ethereum smart contract for the first time. Since 2019, over $7 billion has reportedly been laundered through the Tornado Cash mixer service, with interactions using the protocol now being criminalized.
The allegation in the press release from the Office of Foreign Assets Control (OFAC) at the U.S. Treasury Department concerns the mixer service "Tornado Cash" on the Ethereum blockchain. The protocol promises complete privacy for users by allowing Ether (ETH) to be moved between addresses anonymously. To be sure, Tornado Cash already blocked various cryptocurrency addresses on its web-based front end since OFAC linked transactions to the North Korean hacking group Lazarus. However, the open-source code is stored in an immutable smart contract that authorities sanctioned in a one-time case.
Update 12.08.2022: Tornado founder Alexey Pertsev was arrested in the Netherlands. He is accused of involvement in concealing criminal financial flows and facilitating money laundering.
Public currency mixer
Tornado Cash is an Ethereum-based currency mixer that enables completely anonymous transactions. The origin, destination, and counterparties are deliberately obfuscated to preserve users' financial freedom. Tornado receives a variety of transactions and mixes them together before the protocol routes them to individual recipients. While the real purpose is to protect users' privacy, mixers are often used by illegal actors to launder funds.
Now, Tornado's smart contracts will be fully sanctioned. According to the press release, the organization is used to conduct cyber-enabled activities that are highly likely to result in a significant threat to national security. The company is alleged to have significantly contributed to substantial misappropriation of funds. Further, Tornado Cash allegedly used economic resources, trade secrets, personal identifying information, or financial information to gain commercial or competitive advantage.
Initial sanctioning of a smart contract
The sanctions will prohibit U.S. persons - including U.S. financial institutions - from conducting transactions with the Protocol's public smart contracts. Prohibited transactions include trading or financial transactions, as well as providing liquidity on Tornado Cash. This could criminalize a broad mass of Ethereum users who have used the protocol to preserve their anonymity or pure curiosity.
"Despite public assurances to the contrary, Tornado Cash has repeatedly failed to implement effective controls to prevent it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively target mixers that launder virtual currencies for criminals and those who support them." - Brian E. Nelson, Assistant Secretary of the Treasury for Terrorism and Financial Intelligence
For users, this also means that central exchanges like Coinbase will most likely have to reject deposits if prior interactions with the smart contract can be detected. Also, all USDC in the Tornado Contracts have been frozen. The coding platform GitHub reacted to the sanctions as well and removed the official open source code. In addition, the account of Roman Semenov - developer and co-founder of Tornado Cash - has been suspended. Other code contributors may also be affected.
My @GitHub account was just suspended 🤷
Is writing an open source code illegal now?
— Roman Semenov 🌪️ (@semenov_roman_) August 8, 2022
