An article to understand the timeline of the currency mixer Tornado being sanctioned by the United States, the reactions of all parties and its future impact

Wu Shuo Author|Mingyao

Editor of this issue|Colin Wu

Tornado Cash is an on-chain mixer using zero-knowledge proof technology. By centralizing users' funds into the mixer, the link path between deposit/withdrawal/special transfer addresses cannot be queried to protect user transfers Privacy Purposes. According to data from Dune Analytics, as of August 10, the total transferred amount of the Tornado Cash agreement was approximately US$7.6 billion, and the total income of the agreement was approximately US$18 million. According to the previous analysis of SlowMist, in the first half of 2022, 74.6% of money laundering funds flowed to Tornado in security incidents.

On August 8, 2022, the U.S. Department of the Treasury announced sanctions against Tornado Cash, a decentralized cryptocurrency mixer, prohibiting all U.S. individuals or entities from providing related services to the Tornado Cash protocol, and prohibiting interaction with related Ethereum wallet addresses. In the next two days, the TVL of the Tornado Cash protocol dropped by about 12%, and the price of its token TORN dropped by about 40%. This round of sanctions is the first time the U.S. government has imposed sanctions on DeFi protocols, which has aroused extensive discussions among crypto users on the security, privacy, and "decentralization" of on-chain assets.

This article will briefly sort out the timeline of this incident, summarize the comments of some industry insiders, and summarize the impact of this incident on the industry.

Timeline combing

1. On August 8, the U.S. Department of the Treasury put Tornado Cash on the sanctions list, prohibiting U.S. citizens and institutions from using it

2. On August 8, Circle subsequently froze the USDC funds in the Tornado Cash wallet address approved by the US Treasury

3. On August 9th, the Github account of the founder/community Builder of Tornado Cash was suspended

4. As of August 9, Tornado Cash (TORN) fell to $21.94, a 24-hour drop of nearly 30%

5. On August 9, Gitcoin suspended funding for Tornado Cash

6. On August 9, blockchain research firm Elliptic flagged all relevant addresses for Tornado Cash in the chain

7. On August 9, an anonymous user sent ETH to a large number of famous people through Tornado Cash

8. On August 10, PeckShield pointed out that Curve’s attacker transferred about 340 ETH to Tornado Cash, FixedFloat and Binance

9. As of August 10, Tornado Cash has transferred over $40 million in ETH since OFAC sanctions

10. Tornado Cash compiled a list of prohibited resources, including Tornado Cash official website, GitHub accounts of founders, organizations and participating community builders, all $USDC in the Tornado Cash protocol, infura_io, AlchemyPlatform, and RPC of TC, etc.

11. W3.Hitchhiker pointed out that although the front-end is prohibited from accessing, it can be called directly through the smart contract interface. It can also be accessed through IPNS or directly through the CID of IPFS.

Industry attitude

Many people in the industry have expressed their views on the TC incident. This article selects some comments as follows:

1. Uniswap founder Hayden Adams pointed out that privacy is crucial to a normal society

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Uniswap founder Hayden Adams tweeted his views on this Tornado Cash event: "Privacy is crucial to a normal and safe society, and it is ridiculous and dangerous to focus only on privacy to facilitate illegal activities. Sanction companies Getting it to comply with the law is often not as effective as coming up with sound laws or policies."

2. Bankless founder Ryan Sean Adams strongly supports digital privacy

On August 10, Ryan Sean Adams tweeted that similar incidents will not end with Tornado Cash. Aztec, the Layer 2 protocol dedicated to protecting privacy, Zcash, which has been running for many years, and many other similar tools, will all encryption privacy tools be defined as illegal in the end? Every country faces this problem sooner or later.

3. Circle CEO Jeremy Allaire stated that Circle will freeze the USDC funds in the Tornado Cash wallet address approved by the US Department of the Treasury

Circle said it would work with Coinbase to limit the flow of USDC funds in these sanctioned addresses, otherwise it will face charges of deliberately evading US sanctions compliance obligations, which can be punished by up to 30 years in prison. The regulatory intervention in this case crosses a significant threshold in the history of the Internet and the history of blockchain finance, representing attempts by major governments to prevent or limit the functionality of open source software on the Internet.

4. Patrick Hansen tweeted that EU citizens are not affected by US sanctions on Tornado Cash

But mixers will be considered high-risk transactions under upcoming EU regulations. Connected assets will be difficult to dispose of, require justification, and may be reported to financial regulators. He also said that although yesterday's news surprised many, existing regulations have restricted the use of encrypted anonymity tools and tokens globally for some time.

Summary and Discussion

Regarding Tornado Cash being sanctioned, there are two main voices in the industry.

The first is approval, and the reasons for approval are similar to those imposed by the U.S. Treasury Department. That is to say, many virtual currency activities are illegal, and criminals can easily complete transactions through currency mixers, darknet markets, etc., to evade the tracking and sanctions of illegal proceeds. The Tornado Cash protocol has assisted the hacker group in laundering stolen funds on multiple occasions, totaling more than $7 billion.

Another type of voice is opposition. The founders of many project parties have publicly expressed their disapproval of sanctioning Tornado Cash. The main reason is that for legal transactions, private transactions are still high-frequency rigid needs. And some industry experts have questioned that if Tornado Cash can be sanctioned today, other types of privacy tools can be sanctioned tomorrow. In the context of a market where privacy is just needed, we still need to face the question of where privacy tools should go, and sanctions are obviously not Best answer.

We don’t have a definite answer to where the future of privacy tools lies, but apparently the Tornado Cash incident has made more people think about how to solve people’s needs for privacy tools in the context of compliance, which is what the encryption track is facing A challenge, but also an opportunity for the future. In addition, the decentralization and anti-censorship of WEB2 tools, such as decentralized storage, may also be pursued by capital.

read more:

1. The full text of the US Treasury statement

https://home.treasury.gov/news/press-releases/jy0916

2. Looking at the US sanctions from Tornado users

https://w3hitchhiker.substack.com/p/-tornado-

3. Interpretation of industry impact and risk compliance plan

https://mp.weixin.qq.com/s/Rub4I3fHtyn5sAenhP8zgw