Tornado Cash crackdown by Treasury punishes honest crypto investors

Tornado Cash crackdown by Treasury punishes honest crypto investors
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A tornado is seen in a field in D’arcy, Saskatchewan, Canada on June 15, 2021.

Neil Serfas | via Reuters

of the Treasury Department pressure Tornado Cash was designed to stop criminals. But many ordinary cryptocurrency investors with good intentions are now at risk.

“Every US person will need to be very careful when transacting with Tornado Cash,” he said. Ari Redboard, head of legal and government affairs at research firm TRM Labs, in an interview. “Remember, sanctions are a serious responsibility. The intention is not important.”

Tornado Cash is being used by some people as a legitimate way to protect their privacy in the still nascent cryptocurrency market. When a recipient pays for something using a crypto wallet, the recipient of the transfer has access to the recipient’s public crypto wallet, which shows their account details and history.

Using a cryptocurrency mixing service like Tornado Cash masks these details by anonymizing the funds and hiding the recipient’s identity.

“Even if you’re not doing anything illegal, there’s a need for solutions to help you cover your tracks,” said Tom Robinson, chief scientist at blockchain analytics firm Elliptic.

In blacklisting Tornado Cash on Thursday, the Treasury Department said it was going after criminals who have used the service to launder more than $7 billion in virtual currency since its launch in 2019.

While these sanctions by the Treasury’s Office of Foreign Assets Control (OFAC) are intended to prevent a state like North Korea from converting illicit cryptocurrencies into more usable traditional currencies to finance proliferation, they will affect everyday investors. be tough, experts told CNBC.

In the past, OFAC has classified cryptocurrency wallet addresses as its “List of specially designated citizens.” Now the Treasury is targeting a smart contract address that would allow people to protect their personal privacy, said Peter Van Valkenburgh, research director at Coin Center, a nonprofit cryptocurrency think tank.

‘Targeting a piece of software’

elliptical It also says there is a gap between the Treasury’s data and its own calculations. Elliptic found that at least $1.5 billion was laundered through Tornado Cash through crimes such as ransomware, hackers and fraud, and the government said the $7 billion figure was the total value of crypto assets sent through Tornado Cash.

The consequences of this are already obvious. Circle, the firm behind USDC pegged to the US dollar, has reportedly frozen about $75,000 in Tornado-linked USDC. according to crypto data aggregator Dune.

Crypto exchange Coinbase will also have to prevent its customers from sending money to Tornado Cash, given the new Treasury rules.

Read more about technology and cryptocurrency from CNBC Pro

Redbord says that cryptocurrency holders will eventually find a way to protect their identities.

“While today’s designation affects the United States conducting legitimate operations, they will likely find other ways,” he said.

But the problem for cryptocurrency users looking for an alternative mixing service is that others don’t have the scale of Tornado Cash, making it difficult to protect their identity.

“If no one is using them, then it’s very easy to eliminate the mix and track them,” Robinson said. “To be effective as a mixer, you need a big pot of liquidity out there, and you need time to build that liquidity up and keep using it,” Robinson said.

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