Tornado Cash virtual currency mixer hit by U.S. sanctions

The Ethereum-based platform is believed to have been used to launder over $7 billion in virtual currencies

Updated - August 14, 2022 12:41 pm IST

Published - August 11, 2022 03:26 pm IST

Tornado Cash virtual currency mixer hit by U.S. sanctions following the Harmony and Nomad bridge hacks

Tornado Cash virtual currency mixer hit by U.S. sanctions following the Harmony and Nomad bridge hacks | Photo Credit: REUTERS

The U.S. Department of the Treasury announced on Monday that the Treasury’s Office of Foreign Assets Control (OFAC) was imposing sanctions on Tornado Cash, a virtual currency mixer linked to several crypto hacks. The move comes after the Harmony bridge exploit in late June this year, and the Nomad bridge hack this month. 

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What is Tornado Cash?

The Tornado Cash mixer is a decentralised protocol based on the Ethereum blockchain. Ethereum’s native currency Ether (ETH) is only below Bitcoin in terms of market cap. Tornado Cash accepts crypto tokens in exchange for “mixing” virtual currencies from diverse sources, without investigating or reporting their travel patterns. These funds can be legally obtained assets as well as stolen crypto assets from hacks. While crypto hackers are already difficult to trace due to the decentralised nature of the ecosystem, running the funds through Tornado Cash adds an extra layer - or several more layers - of anonymity to scuttle investigators. Hackers use such virtual mixers so that their transaction trail is not accessible on the blockchain.

“Tornado Cash improves transaction privacy by breaking the on-chain link between source and destination addresses. It uses a smart contract that accepts ETH & other tokens deposits from one address and enables their withdrawal from a different address,” stated the Tornado Cash website.

Other such mixers exist. In May the U.S. government imposed sanctions on a mixer called (Blender), which was linked to North Korean cyber criminals.

However, it would be wrong to assume that Tornado was built for the use of crypto hackers. Numerous legal use cases exist to justify the use of the platform. Tornado even has a compliance tool for those who wish to use it, so they can reveal their transaction history.

How much has been laundered?

The U.S. Treasury Department’s Notice claimed that Tornado Cash had been used to launder over $7 billion in virtual currencies since it was founded in 2019. However, the estimate could be a conservative one.

“This includes over $455 million stolen by the Lazarus Group, a Democratic People’s Republic of Korea (DPRK) state-sponsored hacking group that was sanctioned by the U.S. in 2019, in the largest known virtual currency heist to date. Tornado Cash was subsequently used to launder more than $96 million of malicious cyber actors’ funds derived from the June 24, 2022 Harmony Bridge Heist, and at least $7.8 million from the August 2, 2022 Nomad Heist,” stated the Treasury Department’s release.

An official from the Treasury for Terrorism and Financial Intelligence observed that Tornado Cash had “repeatedly failed to impose effective controls” to stop money laundering on the platform. Rather than a case of non-compliance, it’s more likely that the mixer and its operators have no known way to filter between the funds, since the protocol uses self-executing contracts, or smart contracts.

“While tokens are in a Tornado Cash pool, the custody remains in users’ hands. Users, therefore, have complete control over their tokens,” stated Tornado Cash’s website.

How rampant is Tornado Cash?

According to its website, Tornado Cash operates on the Ethereum blockchain. Since 2021, it has been deployed on Binance Smart Chain, Polygon Network, Gnosis Chain, Avalanche Mainnet, and Ethereum-linked rollups Optimism and Arbitrum One. For this reason, clamping down on Ethereum alone would not be an effective solution.

What will the sanctions do?

The sanctions mean that all property belonging to Tornado Cash that is located in the U.S. or belonging to U.S. persons must be reported to OFAC, and are now considered blocked. The sanctions also block transactions by people in the U.S. involving Tornado Cash, unless otherwise authorised by OFAC.

“As today’s action demonstrates, mixers should in general be considered as high-risk by virtual currency firms, which should only process transactions if they have appropriate controls in place to prevent mixers from being used to launder illicit proceeds,” stated the release.

Crypto hacks in the past including the Harmony and Ronin bridge exploits have been linked to the North Korean state-sponsored Lazarus Group. The Ronin Bridge hack, involving around $500 million, is one of the largest crypto hacks on record. It is unlikely that illicit actors from hostile states or those financing terrorism would comply with OFAC sanctions. Overall, the sanctions serve as a warning to U.S. based individuals in the crypto system who wish to carry out their financial activities while complying with the law of the land.

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