Aug 18, 2022 6 min read

Tornado Cash Is Punished For Doing What It's Programmed To Do

tornado cash

Tornado Cash is a Decentralised Autonomous Organisation, aka a computer program. It's software that "mixes", taking crypto transactions and anonymising the sender and receiver. There's nothing wrong with that, unless you're laundering money! Which caused concern at the US Treasury.




w/Web3


Tornado Cash

Here's a story that's worth taking 2 minutes to look at. Hang in there with me as I need to use a bit of jargon.

It's about a crypto protocol called Tornado Cash.

Tornado Cash is a "mixer" protocol. In simple terms, it hides who the sender and receiver are in a transaction.

It is also a DAO. That means it is computer software. It's not an individual or company. It's just a program running on the Ethereum network. It simply does what it says on the tin.

What Is Tornado Cash And How Does It Work?
Get to know what Tornado Cash is, how it works, and its recent regulatory hurdles.

Sanctioned

However, despite Tornado Cash being (just) a piece of software, the US Treasury banned it last week for violating sanctions against North Korea. The Treasury has accused the computer code of being used to launder money.

Which looks like it is true. But the point is, it's just a piece of code.

At the heart of the issue is that Tornado Cash seems to have been used by criminal groups to make stolen crypto assets hard to trace. The effect was to release half a billion dollars of funds from the theft of various cryptocurrency hacks.

The thing is that Tornado Cash was also used by many users for perfectly legitimate uses. One of the more popular examples being given was to donate to Ukraine causes without being traced by the Russian secret service.

Crypto analysts Chainalysis identified 17% of Tornado Cash transactions to be related to the alleged sanctioned use. A further 10% was related to other stolen funds, and the rest to be either used within DeFi (50%) or by centralised exchanges (18%) to get financial privacy.

Source: Chainalysis

Arrests

This was enough for the US Treasury to take action.

Whether intentional or not, technology was now deemed toxic and the sanction was inevitable.  Shortly followed by the arrest of Alexey Pertsev on August 10th, one of the developers responsible for building the technology.

Whether the individuals were involved in some particular activity with sanctioned entities, or in merely writing the code is in question as well.

Don't Blame The Code

Concerns over money laundering are a problem that hangs over the crypto ecosystem. Chainalysis estimated that something like $33 billion in illicit funds have moved over the crypto blockchains since 2016.

However, this pales into insignificance in the global money laundering "market," which the UN estimates to be as much as $2 trillion a year crossing traditional banking networks.

But this is a crypto story and the writing of software code is considered an act of "free speech" by many. In this case it's easier to go chase the computer program than it is to shut down the large financial networks where real money laundering takes place.

Money Laundering

Here's the thing: Rules around anti-money laundering have turned finance into one of the few industries that is built on a presumption of guilt. Financial services firms assume everyone is a money launderer, drug dealer or tax evader unless they are in insurance, when they assume every claimant is a liar or fraudster.

As a result, financial institutions use risk-based procedures to make sure you're not laundering cash. Which is crazy. It's like Tesco or Walmart running background checks on every customer before they can walk through the door.

Financial Inclusion

The point is that this story leads us to the subject of financial inclusion. The wealthy can navigate money laundering regimes, whereas the poorest cannot.

Poor, vulnerable and marginalised folk can't access the West's network of financial systems on a level playing field.

This is one reason why DeFi and crypto offer an appealing alternative to digital banking and electronic fiat currency.  And why Bitcoin in particular, is proving to be an attractive alternative to a world dominated by the USD.

Now, you may be thinking, if Tornado Cash is mixing up the identities of the sender and receiver, that all sounds a bit dodgy and it's right to sanction them.

But what if you were sending money to support Russians who were secretly helping Ukrainians. You'd want that to be secret, undetected by Putin's secret police, wouldn't you? There are many legitimate reasons for wanting to keep a transaction anonymous, as well as legitimate ones.

Now think about this: JP Morgan Chase is the 2nd largest bank in the world, and undertakes many legitimate financial activities. It has also been found to have been involved in facilitating money laundering. But it's not been sanctioned. Is it really that different?

Further Reading

Tornado Cash crackdown by Treasury puts honest crypto investors at risk of criminal exposure
The U.S. Treasury’s blacklisting of Tornado Cash on Monday will do more than just take down criminals.
Suspected developer of crypto mixer Tornado Cash arrested – TechCrunch
A Dutch government agency says it has arrested an individual suspected of being a developer of the crypto mixing service Tornado Cash days after U.S. sanction.
The Downside of Sanctioning Tornado Cash
OFAC’s blacklisting of an Ethereum smart contract stands to compromise innocent users’ privacy while doing little to stop bad actors.
Michael Saylor Has Bet The MicroStrategy House on Bitcoin
Wiser! Essay: Michael Saylor has bet the MicroStrategy house on Bitcoin. The software company he leads now owns more Bitcoin than any other Corporation in the world.
The Intoxicating Power of NFT Status is Fuelling a $40bn FOMO
Wiser! #64 (Premium): NFT prices are being fuelled by Status and Scarcity. It’s more than just speculating for a huge pay day, NFTs are about bragging rights. And access to a closed community. Sprinkle a limited supply and, voila, you have a $40 billion market!

Premium Members Are The Wisest!

Wiser! readers often ask me how they can support my work. Here’s a way that you can support me.

For just €1 a week, you can become a Premium Member.

Not only will you have my enduring gratitude, you will also get;

  • at least 2 Insights articles a month, exclusive for Premium Members,
  • a personal invite to join the closed Slack community,
  • a quarterly trend report on the most significant subjects in tech,
  • you can ask me anything. I personally answer all questions you may have about what’s happening and what’s next in the tech economy.

🤖 Use AI Writing Tools To Do The Heavy Lifting

Do you ever need to summarise an interesting, long-form article without going through the effort of doing it yourself? Like, when your boss can't be arsed to read it themselves and they dump it on you to do it for them.

Well, here's a hack you'll find useful (and one that I use myself).

Check out Quillbot's AI Writing Tool and find out how I turbo charge my writing!



Great! You’ve successfully signed up.
Welcome back! You've successfully signed in.
You've successfully subscribed to Wiser! Newsletter.
Your link has expired.
Success! Check your email for magic link to sign-in.
Success! Your billing info has been updated.
Your billing was not updated.