Author: Darren Kleine, Blockworks
Translation: Felix, LianGuaiNews
In most parts of the world, privacy is generally considered a fundamental right. However, when it comes to cryptocurrency mixers like Tornado Cash, things become complicated.
On August 8, 2022, the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury announced sanctions against Tornado Cash, placing Tornado Cash on the Specially Designated Nationals and Blocked Persons List (SDN List). Its developer, Alexey Pertsev, was arrested and imprisoned, and the GitHub account of the founder, Roman Semenov, was deactivated.
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Unfortunately, on August 24, 2023, the U.S. Department of Justice charged Tornado Cash founder Roman Storm and Roman Semenov with conspiracy to launder money, violating sanctions, and operating an unlicensed money transmitting business. The indictment alleges that the two individuals were involved in creating, operating, and promoting Tornado Cash, facilitating money laundering transactions worth over $1 billion and laundering hundreds of millions of dollars for the sanctioned North Korean cybercrime organization Lazarus Group. Roman Storm was arrested in Washington state and has been released on bail; Roman Semenov is still at large and has been placed on the OFAC Special Watch List.
The key issue with the continuous sanctions against Tornado Cash by the U.S. government is that the founder allegedly continued to provide and develop the service despite knowing that it was being used for illegal purposes.
In an Empire podcast, Jason Yanowitz, co-founder of Blockworks, pointed out that although the U.S. government considers only 7% of all activities conducted through the service as illegal, the potential profits brought by the Tornado Cash token, TORN, may add another layer of responsibility to the founder. Perhaps the illegal activities taking place on the Tornado Cash platform are not as widespread as imagined, and the court will now start focusing on the profits because the Tornado Cash founder has a clear profit motive.
Holding Bad Actors or Developers Accountable?
Yanowitz believes that holding Tornado Cash accountable is a shame and points out that the nature of mixing technology is inherently “neutral” and platforms that provide assistance to bad actors should not be pursued. Bad actors should be pursued. This event is a replica of the Ross Ulbricht case (Note: Ross Ulbricht, the founder of the dark web marketplace Silk Road, was charged by U.S. authorities in 2015 with money laundering, computer hacking, conspiracy to distribute narcotics, and conspiracy to traffic counterfeit identity documents). Law enforcement “caught the wrong person” in that case.
Co-host Santiago Santos adds that the subtle difference here is that the Tornado Cash developers partly destroyed the keys, and once the keys are destroyed, Tornado Cash will continue to exist. This means that developers cannot revoke the protocol anymore.
Santos states that this event is “very crucial for privacy.” Santos compares cryptocurrency mixing technology to messaging services and mentions a hypothetical scenario where if some illegal activity occurs, and the wrongdoers use a messaging service for communication. By the same logic, should developers be held responsible for the private communications of criminal activities? When does this endless pursuit stop?
Setting a “Terrible Precedent”
Regarding Tornado Cash, Santos pointed out that the biggest issue with this case is that Tornado Cash had allowed the enemies of the United States government (Lazarus Group) to use its service for money laundering.
Yanowitz stated that the lawsuit could “set a terrible precedent” and noted that these rulings could expand the scope of “fund transfers” and KYC AML (anti-money laundering), with laws involving KYC AML covering all non-custodial privacy tools. This could even include atomic swaps and decentralized trading platforms.
Regarding the scope of the term “fund transfers,” cryptocurrency advocacy organization Coin Center believes that the facts presented by the US Department of Justice do not demonstrate any obvious illegal activities related to fund transfers. In a commentary article, Coin Center’s Director of Research, Peter Van Valkenburgh, believes that the allegations in the indictment seem to contradict the guidance of the US Financial Crimes Enforcement Network. He believes that Tornado Cash only provides software for transferring funds, not the actual transfer of funds.
Yanowitz stated that non-custodial service providers must implement KYC AML without any precedents or legal incentives, which he finds absurd. If this case goes to court, it will have a very negative impact on DeFi.
The issue of this case can be summed up as “whether or not to trust that the technology itself is morally neutral and whether it is a good or bad thing.”
Yanowitz believes that the technology itself is morally neutral. It can be used for good or bad depending on the intentions and actions of those who create and use it. The responsibility lies with those who choose to use technology unethically.
How this issue will be characterized and whether Tornado Cash can completely overcome regulatory challenges remains to be seen.
Related reading: Understanding the Background of US Treasury Sanctions on Tornado Cash