Tornado Cash Redesignation: Does it Change Anything for US Users?

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Even as cryp­to melt­ed down over the FTX deba­cle, the US Trea­sury amend­ed the basis it used to sanc­tion cryp­to mix­ing ser­vice Tor­na­do Cash, after law­suits argued the gov­ern­ment can’t enforce such a ban on open-source technology.

On Tues­day 8th Novem­ber, the Trea­sury said its Office of For­eign Assets Con­trol (OFAC) “delist­ed and simul­ta­ne­ous­ly redes­ig­nat­ed” Tor­na­do Cash. It broad­ened its ear­li­er jus­ti­fi­ca­tion, empha­siz­ing that the ser­vice sup­port­ed North Kore­an hack­ers and includ­ing lan­guage to state that it ulti­mate­ly sup­port­ed the country’s weapons of mass destruc­tion (WMD) program.

Tor­na­do Cash is a pri­va­cy plat­form built on the Ethereum blockchain. It ensures finan­cial pri­va­cy by accept­ing user pay­ments and com­bin­ing them into a sin­gle address to con­ceal the orig­i­nal source. Since launch­ing in Aug. 2019, the ser­vice has mixed over $7.6 bil­lion in ether — of which almost 30% was tied to illic­it actors, accord­ing to Chainal­y­sis.

When the Trea­sury first banned the ser­vice in August, it alleged that Tor­na­do Cash obfus­cat­ed the move­ment of over $455 mil­lion stolen by Lazarus, a cyber­crime group run by North Korea’s gov­ern­ment. Its new sanc­tions include alle­ga­tions that Tor­na­do Cash assist­ed, spon­sored or sup­port­ed the Demo­c­ra­t­ic People’s Repub­lic of Korea’s (DPRK) nuclear and bal­lis­tic mis­sile activity. 

Addi­tion­al­ly, the Trea­sury sanc­tioned North Korea’s state-owned air­line Air Koryo and two indi­vid­u­als — Ri Sok and Yan Zhiy­ong — who alleged­ly aid­ed in the trans­fer of mis­sile parts from Chi­na into the country.

Treasury unfazed by lawsuits over open-source protocol

OFAC’s redes­ig­na­tion still means that indi­vid­u­als in the US are banned from send­ing or receiv­ing mon­ey through Tor­na­do Cash. Tech­ni­cal­ly, the only dif­fer­ence is how the Trea­sury is defin­ing the service.

In the months fol­low­ing the ini­tial Tor­na­do Cash sanc­tions, much debate swirled around how and whether OFAC can place sanc­tions against a code. It also pro­duced a chill­ing effect on cryp­to devel­op­ers who were right­ly con­cerned that the OFAC’s view could be a prece­dent-set­ting event.

Coin­base backed a law­suit filed by Tor­na­do Cash users against the Trea­sury, argu­ing that the sanc­tions affect­ed inno­cent users.

Cryp­to pol­i­cy non-prof­it Coin Cen­ter filed a sim­i­lar law­suit, say­ing the Trea­sury exceed­ed its reg­u­la­to­ry author­i­ty since Tor­na­do Cash is not a “per­son,” but is a “pri­va­cy tool beyond the con­trol of anyone.”

Peter van Valken­burgh, Coin Center’s direc­tor of research, had argued that a fed­er­al law empow­er­ing the OFAC only allows it to sanc­tion “prop­er­ty in which some for­eign coun­try or nation­al has an inter­est.” And Tor­na­do Cash didn’t fall under that realm, he said.

The Trea­sury has now addressed that con­cern in a Fre­quent­ly Asked Ques­tions page, say­ing Tor­na­do Cash is, in fact, an enti­ty that may be des­ig­nat­ed under the Inter­na­tion­al Emer­gency Eco­nom­ic Pow­ers Act (IEEPA). The ser­vice can be defined as “a part­ner­ship, asso­ci­a­tion, trust, joint ven­ture, cor­po­ra­tion, group, sub­group, or oth­er orga­ni­za­tion,” it said.

Tor­na­do Cash’s orga­ni­za­tion­al struc­ture con­sists of founders and asso­ci­at­ed devel­op­ers who cre­at­ed the ser­vice and pro­mot­ed the plat­form to increase its user base, the FAQ states. And while the indi­vid­u­als have not been des­ig­nat­ed them­selves, Tor­na­do Cash’s prop­er­ty and inter­ests in prop­er­ty are blocked.

Coin Center’s Valken­burgh believes the redes­ig­na­tion changes nothing.

“Noth­ing they’ve announced changes our strat­e­gy in this law­suit,” he said in a tweet late Tuesday. 

He specif­i­cal­ly addressed the Treasury’s new FAQ about the “enti­ty” being sanc­tioned, sug­gest­ing that the OFAC still doesn’t under­stand the foun­da­tion­al prin­ci­ples of the case.

“These devel­op­ments under­score the arbi­trary and capri­cious nature of Treasury’s actions and their con­tin­ued mis­un­der­stand­ing of the tech­nol­o­gy,” he added.

What the redes­ig­na­tion did affect was Tor­na­do Cash’s native token TORN, which has plunged to $4.23 at the time of writ­ing, data from CoinGecko showed. At its peak in Feb. 2021, the coin was worth $436.16.

The OFAC’s lat­est jus­ti­fi­ca­tion is just a pow­er game, accord­ing to Sla­va Dem­chuck, CEO of cryp­to com­pli­ance com­pa­ny AMLBot.

“The whole sto­ry with mix­ers and anonymi­ty in the cryp­to mar­ket is noth­ing more than an attempt by the reg­u­la­tor to show its strength and con­trol over the par­tic­i­pa­tion of the cryp­to mar­ket once again,” he told Blockworks.

‘Dusting attacks’ to be safeguarded

Promi­nent cryp­to users includ­ing Justin Sun, Jim­my Fal­lon and Shaquille O’Neal have report­ed being blocked by DeFi pro­to­cols after being sent ran­dom amounts of ether via Tor­na­do Cash in a “dust attack.” This implied that ordi­nary cryp­to users with no nefar­i­ous activ­i­ties weren’t nec­es­sar­i­ly safe.

The OFAC’s updat­ed FAQ now includes a pro­vi­sion for such sce­nar­ios, allow­ing peo­ple who received a “dust­ing trans­ac­tion” to apply for a spe­cif­ic license in order to engage in the transaction.

Alex Pipu­shev, founder of GTON Cap­i­tal, believes Tor­na­do Cash’s decen­tral­iza­tion effec­tive­ly means the ser­vice will con­tin­ue undeterred.

“Despite the fact that reg­u­la­tors basi­cal­ly switched it off, they can’t pre­vent its func­tion­ing. You can block web­sites, you can push min­ers to cen­sor trans­ac­tions or you can black­list address­es who inter­act­ed with dApps. But, true decen­tral­ized appli­ca­tions can­not stop work­ing any­way even if you put devel­op­ers into jail,” he told Block­works.
A Tor­na­do Cash blog states: “Remem­ber — no one can stop Tor­na­do Cash. It will remain for­ev­er unstop­pable, secured, decen­tral­ized and censorship-resistant.”


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  • Shalini Nagarajan
    Shali­ni Nagarajan

    Block­works

    Reporter

    Shali­ni is a cryp­to reporter from Ban­ga­lore, India who cov­ers devel­op­ments in the mar­ket, reg­u­la­tion, mar­ket struc­ture, and advice from insti­tu­tion­al experts. Pri­or to Block­works, she worked as a mar­kets reporter at Insid­er and a cor­re­spon­dent at Reuters News. She holds some bit­coin and ether. Reach her at [email pro­tect­ed]



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