The U.S. Office of Foreign Asset Control (OFAC) has banned the Tornado Cash mixer, putting more than 40 crypto addresses on the SDN (Specially Designated Nationals and Blocked Persons List) list. The industry reacted dramatically — the account of one of the mixer’s co-founders on GitHub was suspended, and Circle froze over $75,000 linked to the sanctioned addresses.
The U.S. Treasury Department blocked 44 USD Coin (USDC), and Ethereum (ETH) addresses connected to the Tornado Cash mixer. According to the department, “since its creation back in 2019, Tornado Cash has reportedly laundered more than $7 billion worth of virtual currency.”
Brian E. Nelson, U.S. Department of the Treasury’s Under Secretary for Terrorism and Financial Intelligence, said that the OFAC recognizes Tornado Cash as a cybercrime money laundering site. Nelson stated that the mixer cannot maintain effective AML controls, and the Treasury Department will continue to take aggressive action.
Recall that Tornado Cash began checking users’ addresses against sanctions lists in April. However, at the time, compliance with U.S. government requirements was only nominal, and access to Tornado Cash smart contracts remained open to attackers.
All U.S. individuals and entities are prohibited from interacting with the USDC and ETH smart contract addresses on the SDN lists. Penalties for willful non-compliance can range from $50,000 to $10 million, and malicious violations will be punishable by 10 to 30 years in prison.
OFAC sanctions on Tornado Cash apply to all individuals and entities in the United States. Any interaction with the mixer, whether it be donating Gitcoin, working for the project, downloading its software, visiting the website, etc., can be construed as a violation.
Right after OFAC’s announcement, Tornado Cash co-founder Roman Semenov reported that his account on the collaborative development platform GitHub was blocked. Semenov said he has not personally been placed on SDN’s sanctions lists, but he has had to deal with the consequences of the OFAC’s decision.
The Federal Financial Institutions Examination Council (FFIEC) claims that any contact with sanctioned transactions can be construed to include “downloading a software patch from a sanctioned entity.” Semenov says such a decision imposes “illogical” restrictions on Tornado Cash’s software developers.
According to Jake Chervinsky, Blockchain Association’s Head of Policy, the U.S. Treasury Department’s move could “cross a line” between punishing miscreants and those who develop technology for the industry. The OFAC sanctions, he said, “threaten that smart and balanced approach to crypto.”
Crypto data aggregator Dune Analytics reported that USDC’s stablecoin issuer reacted quickly to the OFAC’s decision. Circle froze over $75,000 in funds linked to 44 SDN-listed addresses on Tornado Cash.
A blockchain enthusiast BowTiedIguana has estimated that Tornado Cash’s smart contract addresses currently hold $437 million worth of assets in stablecoins, Ethereum (ETH), and Wrapped Bitcoin (WBTC). And there is a possibility that issuers will take steps to prevent transactions on Tornado Cash or buy back such assets following the OFAC decision.
Technically, the entities behind USDC and Tether would be required to freeze transfers of their stablecoins to and from the mixer at the smart contract level. This decision would allow the organizations to comply with U.S. Treasury sanctions. Similarly, BitGo would theoretically have to restrict access to Tornado Cash and suspend WBTC redemptions on the mixer.
The popularity of crypto mixers doubled in 2022, drawing the regulator’s attention to Tornado Cash. Chainalysis reported that in April 2022, the 30-day moving average of total daily value received by crypto mixers reached an all-time high of $51.8 million, which is double the incoming volume received in 2021. Chainalysis analysts also highlighted that 10% of all funds coming from illegal addresses are sent by crypto mixers.
Tornado Cash has repeatedly appeared in schemes to launder stolen money. For example, hackers have been known to send stolen ETH to the mixer after a hack of the Ronin sidechain in March, which became the largest in the DeFi segment. And late last year, hackers laundered about $200 million in assets stolen from BitMart via Tornado Cash.
