Experts see Tornado Cash blocking as a threat to the market

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On August 8, the US Department of the Treasury published an update to the Sanctions List (SDN) to include the Tornado Cash cryptocurrency protocol and associated digital wallet addresses. The regulator justified its decision by saying that the platform was used for money laundering – crypto assets were purchased with illegally obtained income.

The blockchain protocol running on the Ethereum network – Tornado Cash allows you to increase the confidentiality of transactions by hiding the connection between the source and recipient of tokens. Sanctions against this platform were felt not only by its users, but also by other participants in the crypto market.

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Tornado Cash customers immediately started withdrawing their funds. In the first three hours alone, $14.7 million was withdrawn from the platform. The mixer token TORN lost over 60% in price from August 8, when it was trading at $30.5, to $12 ten days later. Cryptocurrency capitalization decreased from $45.9 million to $18 million, according to Coingecko.

Github, the largest web service for hosting IT projects and their joint development, has closed an account owned by developer Tornado Cash. Platform co-founder Roman Semyonov wrote on Twitter that his account was blocked, noting that he personally was not included in the US sanctions list.

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Circle, the issuer of the USDC stablecoin, blocked the addresses associated with the Tornado Cash cryptomixer, which in turn put MakerDAO’s DAI stablecoin at risk, as the token is backed by USDC by 32%.

In this regard, the CEO and founder of the Swiss platform ShapeShift, Eric Voorhees, recommended that the MakerDAO community begin to immediately transfer collateral from USDC stablecoins to another stable cryptocurrency that is more resistant to censorship. The Maker DAO Protocol has begun considering a $3.5 billion purchase of Ethereum to replace USDC in backing its stablecoin.

The capitalization of stablecoin USD Coin (USDC) has decreased by more than $1 billion after Circle blocked Tornado Cash addresses. The market value of this cryptocurrency is now $53 billion, compared to $54.4 billion on August 8, according to Coingecko. At the same time, the capitalization of another stablecoin Tether (USDT), a USDC competitor, grew by $1.8 billion: from $65.8 billion to $67.6 billion.

Infura and Alchemy infrastructure services have begun blocking remote requests to the Tornado Cash cryptomixer. And the dYdX crypto exchange blocked the accounts of users who interacted with the Tornado Cash cryptomixer.

The troubles associated with the mixer are not limited to blockages. In June 2022, the Dutch Financial Crimes Enforcement Agency (FIOD) opened a criminal case against Tornado Cash. And on August 12, FIOD in Amsterdam arrested 29-year-old developer Aleksey Pertsev on suspicion of involvement in money laundering through a cryptomixer.

The human rights organization Сoin Center is considering the possibility of challenging in court the decisions of the US authorities to add the cryptocurrency mixer Tornado Cash to the sanctions list. A service that enhances the confidentiality of transactions, Tornado Cash is a decentralized application that no one controls, human rights activists noted.

According to the Coin Center, sanctions against software, unlike sanctions against individuals or entities, can be challenged in court, human rights activists say.

The experts told RBC-Crypto who else could be affected by the Tornado Cash ban and who could win in this situation.

“Anyone can be subject to the same restrictions”

OFAC (Office of Foreign Assets Control) sanctions imposed on the Tornado Cash protocol, and not on the wallets that interacted with it, are a serious threat to the DeFi industry as a whole, says Chen, CFO and head of trading operations at ICB Fund Limin.

According to him, now any protocol that has not implemented KYC / AML verification into the code can be subject to the same restrictions, and their developers will face arrest, as happened with Alexey Pertsev, who is associated with Tornado Cash. The FATF actually recommended that the regulator implement such requirements, the expert said.

He noted that if you look at the situation narrowly, then this is a signal that the US authorities do not accept any services for mixing cryptocurrencies and coins with privacy functions. According to SlowMist, three-quarters of all criminal funds in the Ethereum network were laundered through Tornado Cash and only 1.5% through centralized services, the remaining coins remained in the wallets of hackers, the expert said.

“The decision was not unexpected”

Such “mixers” are attractive to representatives of the criminal world and other persons who want to legalize the money they have received illegally, said Daniil Gorkov, lawyer at the Criminal Defense Firm. So far, Tornado Cash has been considered the most secure “mixer” built on the Ethereum blockchain, he said.

The lawyer noted that, unlike other “mixers” available on the crypto market, Tornado Cash was the most open and the most public precisely in terms of communication with the authorities and users. It was positioned rather as a tool for ensuring financial privacy, aimed at maintaining the confidentiality of users’ personal data, Gorkov specified.

He admitted that the decision made regarding Tornado Cash was not unexpected, since the US Financial Crimes Enforcement Agency (FinCEN) had already applied negative measures against other “mixers”.

According to the lawyer, refusing to block Tornado Cash addresses will lead to penalties for businesses, and for citizens it may come down to the risk of criminal liability, which was previously discussed in the US in terms of combating cybercrime.

Who will win in this situation

The need of society for the activities of “mixers” is steadily growing, says Gorkov. He believes that the place of Tornado Cash in the market will very soon be taken by another effective tool for ensuring financial confidentiality, which will be offered by competitors.

OFAC will not be able to rule out the use of Tornado Cash or its forks, said Chen Limin, CFO and Head of Trading at ICB Fund. He explained that the latter may appear in other networks, but the liquidity factor will be key.

The expert added that there are other mixing services on the Ethereum network, in particular ETH-Mixer. However, in Tornado Cash, according to the specialist, they consider Monero to be their competitors, earlier the US Internal Revenue Service promised a reward for breaking its privacy function.

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Source: Cryptocurrency

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