In August 2022, the U.S. Treasury Department’s Office of Foreign Assets Control — also known as OFAC — sanctioned Tornado Cash, a cryptocurrency mixer that mixes funds together to make tracing their sources more difficult. Virtual currency mixing services can be used to launder stolen funds, and the US Treasury Department says Tornado Cash has reportedly processed over $500 million from multiple online hacks and heists. The sanctions provide for the following:
All assets currently in Tornado Cash will be frozen.
Transactions to or from Tornado Cash are prohibited.
The mixer itself is code-locked (although it’s virtually impossible to turn off the technology).
But while the sanctions should target money laundering, some crypto enthusiasts believe OFAC is exceeding its powers by sanctioning a digital asset and not a person or entity. Critics of the sanctions are concerned about their impact on crypto user privacy and possible future shutdowns. In September, six people challenged those sanctions by filing a lawsuit against the US Treasury funded by crypto exchange Coinbase.
Here’s what you should know about cryptocurrency mixers and what these government sanctions could mean for your future investments.
Cryptocurrency mixers, also known as tumblers or mixers, are designed for manufacturing Actions on the blockchain more private by blending together data from separate transactions. This prevents anyone from being able to trace where a particular asset came from, making transactions essentially anonymous.
Mixing services charge a fee, typically between 0.25% and 3% of the amount sent through the mixer. Although they can be legal if properly registered, mixers have made headlines for their use in money laundering and other cybercrimes.
Tornado Cash, for example, is one of the first decentralized applications on the Ethereum blockchain to offer private transactions and has reportedly “shuffled” millions of stolen funds from multiple online heists. One of the biggest heists moving funds through the mixer was spearheaded by a state-sponsored DPRK hacking group sanctioned by the US Treasury Department in 2019.
According to a July 2022 report by blockchain analytics firm Chainalysis, mixer usage is at an all-time high, with 23% of funds sent to mixers coming from addresses associated with illegal activities.
What are sanctions and how are they enforced?
OFAC imposes economic sanctions—penalties that act as a deterrent to prohibited activities—on certain countries, individuals, and companies. The recent sanction against Tornado Cash is list-based, requiring the freezing of assets owned by the company and prohibiting transactions with related actors.
OFAC has specific guidelines for virtual currency sanctions. Specifically, anyone holding a blocked cryptocurrency must report the asset to OFAC within 10 business days of the currency being blocked and deny anyone else access to it (so no selling or trading). If you want to withdraw money, you need to apply for special permission from OFAC.
In the case of Tornado Cash, starting August 8, 2022, US users will no longer be allowed to send assets through the mixer — or retrieve funds stuck on the platform — without special approval from the US Treasury Department. OFAC noted that it would look positive Applications by Users try to withdraw their money.
How have crypto issuers and platforms reacted to the sanctions?
In accordance with the government sanction, Circle, the issuers of USDC – a stablecoin pegged to the US dollar – over $75,000 in assets frozen on the platform.
The developers of Tether (USDT)another US dollar-based stablecoin, issued a public statement that they would not freeze all accounts associated with Tornado Cash and would await an official, direct request from OFAC.
exchange platform coin base is funding a lawsuit against the US Treasury over the sanctions, alleging that the Treasury exceeded its powers by blocking the software rather than just individual actors.
I don’t use Tornado Cash. Could this affect me?
For the majority of users, sanctions at this level will not affect their investments, but it does suggest that other crypto platforms used for money laundering could be shut down.
For now, decentralized finance or DeFi, Apps like Mixer work more like the Wild West than Wall Street. They are designed to operate without intermediaries, but a lack of internal regulation can leave such platforms open to abuse and potentially a target of government regulation or penalties.
Since Tornado Cash operates on the Ethereum blockchain, these events also have the potential to affect Ethereum as a whole. For example, if the government asked Ethereum validators to ban Ethereum blacklisted addresses and a majority of validators complied, this would effectively make Ethereum more regulated. To date, the government has not made this request and it is unclear whether a majority of auditors would comply if it did.
How do I ensure my crypto assets are not affected by sanctions?
“Make sure the products you invest in are from verified providers who are compliant,” says Katherine Dowling, Chief Compliance Officer at Bitwise Asset Management.
It can be tempting to use services that promise high returns or absolute privacy, but these platforms are not without risk. In the decentralized environment of cryptocurrency, it is particularly important to invest in products with a clean track record. Penalties for violating OFAC sanctions can range from a warning to a substantial fine or even a criminal investigation.
However, it is impossible to predict whether a service will be used for illegal purposes. Compliance with sanctions isn’t always in your control either: the day after Tornado Cash was sanctioned, an anonymous user sent small transactions from the mixer to high-profile Ethereum accounts, all of which failed to block the transfers.
OFAC said it is aware of this practice, known as dusting, and will not prioritize enforcement against such recipients. But if you are a recipient, you should decline or block the transaction by typing Submission of a report to OFAC within 10 working days.
What does this mean for crypto?
When Tornado Cash was sanctioned, the government took control of all of their addresses and froze the assets associated with them, which could set a standard for future government crackdowns on crypto.
“We will continue to see tension between privacy and national security interests,” Dowling says. “But we need to create better tools to deal with violations.”
Until there are better tools to regulate products like Tornado Cash, government security measures to combat illegal activity could also affect innocent users of those products.
Neither the author nor the publisher were involved in the above holdings at the time of publication.