Cryptocurrency mixers, software that provides anonymity in crypto transactions, are at the forefront of the latest clash between regulators and the emerging world of digital assets, with lawsuits, arrests, counter-suits and North Korean hackers who are all part of the picture.
The US Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions on cryptomixer Tornado Cash in August. This is based on allegations that since its inception in 2019, the mixer has processed more than $7 billion in cryptocurrency, including from criminal organizations like the North Korean state-backed Lazarus Group.
“Despite public assurances to the contrary, Tornado Cash has repeatedly failed to impose effective controls designed to prevent it from routinely laundering funds to malicious cyber actors and without basic measures to address its risks,” the deputy said. -Treasury Secretary Brian E. Nelson in announcing the sanctions. “Treasury will continue to aggressively pursue actions against mixers who launder virtual currency for criminals and those who assist them.”
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Sheila Warren, chief executive of the Crypto Council for Innovation, said the sanctions – effectively a ban on US citizens and businesses from using the service – set a shaky precedent and would have “potentially very significant implications”.
“This is a departure from the principle that code or technology itself has a fundamental neutrality that is benign, and it’s what you do with it that makes it something that can be malicious,” he said. she told the Forkast live-streamed event, “Crypto Rising: The Role of Law: An International Debate post Tornado Cash” on October 5.
In addition to sanctioning specific wallets, all assets held in Tornado Cash were frozen, triggering a backlash from many in the crypto community and legal action against the Treasury. The case filed by six Tornado Cash users and backed by cryptocurrency exchange firm Coinbase Global, Inc could set important precedents for US regulators.
Privacy vs Security
Proponents of crypto mixers claim they are key to privacy on the blockchain because they obscure the history and origin of digital assets. When the mixer receives cryptocurrency, it bundles it with other users’ assets, “mixes” them together, and returns the same amount of funds, less a fee, to a new wallet that the user can access with a special digital key – although the details of how Tornado Cash works differ slightly.
The ability to move cryptocurrency into a wallet that has never been used or associated with the user ensures more privacy. Although cryptocurrency is often considered anonymous, it is pseudonymous, with each transaction traceable to a public cryptocurrency wallet address.
A wallet can be associated with the real identity of the user as it is used in transactions with traditional finance. For example, once a wallet is added to a third-party exchange, the user’s wallet and bank account can be linked.
While the absence of crypto mixers would have a negligible effect on legal cryptocurrency activity, they present a dilemma for regulators and members of the cryptocurrency community, according to legal and blockchain experts.
“Virtually everyone would agree that privacy is valuable, and that in a vacuum there is no reason services like mixers shouldn’t be able to provide it, however, this has to be balanced with the fact that 25% of mixed funds come from illicit activities. addresses,” Andrew Fierman, head of sanctions strategy at US blockchain analytics firm Chainalysis, told Forkast in an email.
A significant amount of the more than $7.6 billion in Ether crypto that Tornado Cash has received since its launch in August 2019 comes from illicit or high-risk sources, including $455 million from Lazarus Group hacks, according to the data. by Chainalysis.
In the first half of 2022, crypto addresses linked to illicit activity transferred almost 10% of their funds to cryptocurrency mixers like Tornado Cash, Chainalysis data shows, which did not provide a figure in dollars.
Given the data, Fierman said, “we could see this trend continue and OFAC designate other mixing services used by cybercriminal groups.”
However, on the privacy and security side of the argument, Ethereum co-founder Vitalik Buterin said he used Tornado Cash to donate to Ukraine after the Russian invasion, stating that the service allowed him to do so without disclosing the recipients’ identities.
Christopher Goes, the co-founder of Anoma, a privacy-centric blockchain protocol, said Forkast via email that he is skeptical of how penalty mixers would work, as they are not targeted or specific enough to shut down particular games.
He argues that protocols are easy to copy and rename, diluting anti-money laundering efforts, while freezing individuals’ assets for using a service that was legal when first used.
“While I can see how that goal makes sense in some US foreign policy logic, I’m not sure sanctioning Tornado Cash will actually accomplish it or help it,” he said.
At its core, Tornado Cash is just code running on various open public blockchains like Ethereum, making it a complex entity to regulate. The code was publicly available for anyone to use on the open-source software hosting service GitHub.
The code was later removed from GitHub over concerns that even hosting the software could violate Treasury sanctions.
Tornado Cash advocates pushed back, arguing that OFAC lacked the authority of Congress to sanction the code, which they say is an expression of free speech, as established in 1996 in the Bernstein v U.S. Department of State Case.
Digital rights group the Electronic Frontier Foundation said in a blog post: “The disappearance of this source code from GitHub after government action has raised the specter of government action chilling publication of this code”.
Peter Van Valkenburgh — the research director at the Coin Center, a public policy and cryptocurrency nonprofit — weighed in, saying the Tornado Cash ban is unconstitutional.
OFAC has since backed down slightly, saying that “American persons would not be prohibited by US sanctions regulations from copying open-source code and making it available online for others to view.” The code is now back on GitHub, but in a read-only form.
Ethereum Core Developer Preston Vanloon tweeted about the inversion, saying: “It’s an improvement over an outright ban. I always encourage GitHub to undo all actions and revert repositories to their old status.
Another victim is 29-year-old developer Alexey Pertsev who was arrested in Amsterdam on August 10 by the Dutch Tax Information and Investigation Service (FIOD) for his alleged involvement in the Tornado Cash Protocol.
Accused of facilitating money laundering through the mixer, Pertsev was sentenced to 90 days in jail on August 25, although he was not charged with any crime.
Six people who said they had funds trapped in Tornado Cash filed a lawsuit Aug. 8 against OFAC and the Treasury Department, alleging the penalties exceeded the agency’s authority, violated users’ constitutional rights and threatened the ability of law-abiding Americans. freely and privately engage in financial transactions.
Coinbase Global Inc., the largest US cryptocurrency exchange, helped organize and fund the lawsuit.
The Treasury Department announced on September 13 a way for Tornado Cash users to recover their funds by applying for an OFAC license to withdraw funds legally.
According to data from DeFiLlama, more than US$1.6 million is frozen in Tornado Cash accounts, and much of it may well be illicit, but as with Buterin’s donation in Ukraine, there are legitimate reasons why the users may want layers of privacy when making a transaction.
In another lawsuit filed against the US Treasury in September, plaintiff Tyler Almeida said he used the mixer to privately donate 0.5 ETH to the public address of the Ukrainian government crypto wallet. Almeida said this was to prevent public crypto wallets that donated Ukraine’s public addresses from being targeted by Russian state-sponsored hackers, according to the complaint.
Despite Treasury actions, cryptocurrency mixers are not illegal. Other services, such as UniJoin and ChipMixer, are still operational. However, the risk of sanctions is looming, according to Leonie Tear, an attorney at King & Wood Mallesons and a Certified Global Sanctions Specialist with the Association of Certified Anti-Money Laundering Specialists.
“I think this is a wake-up call to the whole industry in terms of the need to have compliance programs in place,” Tear said.
While the decentralized nature of Tornado Cash makes it difficult to identify individual bad actors, targeting the most high-profile cups can deter users and encourage new industry standards, Tear added.
“All of this is pushing the industry to really put in place proper controls and prevent the use of virtual assets for criminal purposes,” she said. “The goal – I don’t think – is just to stifle innovation or prevent the use of cryptocurrency, it’s just to try to harness the wilder side.”
Some crypto companies have distanced themselves from Tornado Cash. Circle, issuer of the popular dollar-pegged stablecoin USDC, froze 75,000 USDC held by users linked to Tornado Cash.
Conversely, Tether Holdings Ltd., the issuer of the world’s largest stablecoin by market capitalization, USDT, has decided not to freeze assets related to Tornado Cash unless specifically instructed to do so by security forces. order.
Christopher Goes at Anoma said that this story is far from over anyway.
“I see a lot of productive engagement, and I expect that to continue,” he said, “both technology and regulations are complex, and I hope all parties involved can make exercise patience and assume good intention by default.”
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What’s Next For Cryptocurrency Mixers After US Tornado Cash Sanctions? – Tech Tribune France
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