Blacklisting Tornado Cash Stopped Law Abiding Citizens but Not Criminals
A Sydney, Australia man who claimed he had developed an algorithm to gain an edge against the bookies could avoid a prison sentence for defrauding investors in his sports betting fund, the Australian Associated Press (AAP) reports.
On May 14, 2024, Alexey Pertsev, one of the leading developers of crypto mixer Tornado Cash, was sentenced by a Dutch court to 64 months in prison for money laundering. Roman Storm, a co-founder of the platform, is awaiting trial for similar charges in the US.
Meanwhile, Keonne Rodriguez and William Lonergan Hill, founders of Samourai Wallet, have been arrested and are facing charges of money laundering and operating an unlicensed money-transmitting business. The Samourai Wallet has a crypto tumbler feature that enables users to obfuscate transactions.
Prior to these two cases, the founders of Tornado Cash alternatives, Bitcoin Fog and Helix, were arrested and prosecuted in 2021 and 2023, respectively.
While well-meaning and seemingly intended to protect the public, it is becoming apparent that the fight on crypto mixersis not stopping the targeted criminals. Instead, it is making it more daunting for ordinary citizens with genuine and lawful reasons to protect their privacy on public blockchains.
The dark side of crypto mixers like Tornado Cash
Regulators and law enforcement have primarily cited the use of crypto mixers like Tornado Cash by criminals to launder ill-gotten money, such as assets stolen from exchanges, as the reason for shutting them down and prosecuting their developers.
One of the most noted criminal enterprises targeted is the Lazarus group, thought to be working on behalf of the North Korean government. According to a report published by the blockchain analytics firm Elliptic in March 2024, when authorities targeted Tornado Cash, the Lazarus group had used the platform to launder close to $500 million worth of assets.
However, the legal actions on crypto mixers are turning out to be more retributive to the developers than achieving meaningful milestones in stopping criminals like the Lazarus group.
Indeed, inferring from information adduced during Alexey Pertsev’s trial, the most likely outcome of the campaign is denying law-abiding citizens the ability to add privacy to receiving, holding, and spending crypto assets.
While the number of users of Tornado Cash crypto mixing service has dropped by over 90% since the U.S. Department of the Treasury blacklisted it in August 2022, assets worth as high as $300 million are processed on the platform every month.
The sharp drop in the number of users could be easily explained by the fact that in July 2023, the US regulator shut down user-facing Tornado Cash applications, which were friendlier to law-abiding citizens. Meanwhile, the Tornado Cash protocol on the Ethereum blockchain is still working as it was designed to.
That means while most ordinary users, who are generally non-tech savvy and less likely to be interested in hiding criminal activities, may struggle to figure out how to use the protocol on the Ethereum blockchain without a user-friendly interface, hackers like the Lazarus group are tech savvy enough to use the information available on places like the Tornado cash GitHub page to create their own portals to access the service.
But why would law-abiding ones even consider using the Tornado Cash crypto mixing service?
The place of tumblers like Tornado Cash
Crypto mixers or tumblers are protocols that facilitate the obfuscation of transactions so that they are less traceable on public blockchains like Bitcoin and Ethereum.
Unlike traditional finance (TradFi), where accessibility to the transaction ledger is limited to the service provider and the customer, blockchains are public ledgers that are accessible to one and all.
It only takes someone linking one of your public addresses to your real-world identity, and they can track your financial behavior with extreme details. And that person could be a criminal who can use that information to hurt you.
With time, different actors, including criminal elements, are building tools to make scraping data from public blockchains and linking it to data collected elsewhere easy.
It could be argued that crypto mixers or tumblers like Tornado Cash are critical in making public blockchain safe for users, especially ordinary citizens. The need for privacy on public blockchains is even more dire for activists and dissidents who need to protect themselves from the surveillance of repressive regimes around the world.
With that in mind, using crypto tumblers like Tornado Cash for money laundering, while a major issue that demands attention and action, should be seen as an anomaly that must be dealt with without throwing the baby out with the bath water.
In the early days, shutting down crypto tumblers achieved the stated goal because, for the most part, they were centralized platforms that mostly operated the same way as centralized exchanges.
All it took to prevent bad actors from using the service was to take a website offline by striking a domain name from a registry. That is what happened to the once popular crypto mixer Sinbad, which was shut down by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) in November 2023.
With Tornado Cash and other second-generation crypto tumblers, denying hackers and criminals access to the service has become a little more complicated, and we can even say it is impossible to shut them down. Tornado Cash, in particular, is an open-source, non-custodial, fully decentralized protocol on the Ethereum blockchain.
It is a service made possible through the use of smart contracts on the blockchain, which means the platform is not under the direct control of any individual, entity, or group of people and has no single point of failure. Indeed, not even the developers who wrote the code can control it.
Like most decentralized applications, Tornado Cash is a community project maintained through consensus.
Besides arresting and prosecuting developers behind Tornado Cash, Samourai Wallet, Bitcoin Fog, Helix, and other similar projects, authorities have mostly resorted to shutting down the user-friendly interfaces of these protocols, mostly websites and mobile applications.
Of course, as a smart contract on the Ethereum Blockchain, authorities can not stop the back-end system. That means tech-savvy individuals can still use it to process payments. What they need, for the most part, is access to the Tornado Cash Github page.
In the most recent Tornado Cash news, about $3.7 million of the $26 million worth of assets stolen from Kronos Research, a trading firm, in November 2023 were transferred to Tornado Cash on May 20, 2024.
Ordinary people who want to receive, store, and spend their digital tokens on a public Blockchain are being disenfranchised by the actions that authorities had taken on crypto mixers like Tornado Cash.
Indeed, given that blockchain is accessible globally, we are almost guaranteed to see more Tornado Cash alternativescome online. However, the service will most likely remain unavailable to law-abiding citizens in the foreseeable future because friendly user interfaces for the general public, similar to the Tornado Cash app and website, will not be built. That will make the privacy of law-abiding citizens an easy target for hackers and other types of criminals, who can then use information collected to steal from them and then use the decentralized protocols to launder the proceeds.
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