Things have not been looking too good for the crypto market over the past few months as the market seems to have been gripped by bad news after bad news. On Aug. 8, the U.S. Treasury Department’s Office of Foreign Assets Control issued legal sanctions against digital currency mixer Tornado Cash.
According to the regulator, the platform has been used for a variety of illegal money laundering activities worth an estimated $7 billion since its inception in 2019. Of that sum, an estimated $455 million was controlled by the notorious Lazarus Group, a North Korean state-sponsored hacking group. In addition, Tornado Cash was also used to launder over $96 million in ill-gotten gains from June’s Harmony Bridge hack and $7.8 million from this month’s Nomad heist.
However, before proceeding, it is best to understand what exactly a cryptocurrency mixer is. Simply put, it is an offering that helps obfuscate potentially identifiable or tainted cryptocurrency funds with others to erase all traces associated with the assets, making it impossible for anyone to trace the tokens back to their original source.
Arrest of author leads to public outcry
On August 12, Alexey Pertsev, the inventor of Tornado Cash, was arrested by Dutch authorities. According to a press release from the Netherlands’ financial crime agency – the Fiscal Information and Investigation Service – the arrest was made on the basis that Pertsev was involved in “concealing criminal financial flows and facilitating money laundering”.
While Tornado Cash can potentially be used by bad actors to hide proceeds of crime, it can and is also used to facilitate a variety of legitimate activities. Dutch police have yet to clarify what exact rules Pertsev broke, although various media outlets have speculated and given differing explanations as to why he was arrested. Tornado Cash creator has yet to be charged with wrongdoing.
On August 20, following Pertsev’s arrest, a crowd of protesters gathered in Amsterdam’s Dam Square to express their dissatisfaction with the way the matter was handled. And while protesters did not directly comment on the legal issues surrounding the arrest, they claimed that Pertsev’s arrest signaled a dark future for the fast-growing Web3 ecosystem. Not only that, they also believe that this could have a chilling effect on the Netherlands’ existing blockchain ecosystem.
Mark Smargon, CEO of decentralized payments network Fuse, told Cointelegraph that while he’s very disappointed to see a developer being arrested simply for writing a piece of code, crypto-financial companies — especially those that see the mainstream — are so Wanting to avoid scenarios in the future Takeover in sight – should be willing to work with serious players in the Web3 space to mitigate existing security issues while ensuring people’s rights to individual privacy.
However, Abraham Piha, co-founder and CEO of Web3-focused firm Tomi, told Cointelegraph that government sanctions like these are scary when you start looking at them objectively:
“Tornado only existed because most blockchains weren’t private enough. If successive updates of Ethereum or Bitcoin include protocol integrations like Mimblewimble, will the next step be to block them as well? This law is another reason to push for Web3, a free web controlled by users and not some big brother governments.”
A spokesperson for crypto policy think tank Coin Center noted that the nonprofit is considering taking the matter to court, believing the core argument prohibiting the platform from operating is unfounded. Not only that, but the independent panel believes the Treasury Department’s actions may have exceeded its statutory authority.
Was Tornado’s Forced Shutdown Unconstitutional?
In a recent interview with Bloomberg, Jesse Powell, CEO of digital asset exchange Kraken, argued that the Treasury Department’s actions to shut down Tornado Cash may be “unconstitutional,” stating that people have a right to privacy, and so they do It will be interesting to see if the regulator’s claims can stand up in court at all. He further stated that the subsequent removal of Tornado’s native code repositories was a “completely unnecessary step”.
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Following the sanctions, Circle, the issuer of stablecoin USD Coin (USDC), decided to ban all Tornado Cash addresses, to which Powell responded, “Having a digital currency that is so controlled and can be controlled by potentially unconstitutional government actions , a is a bit scary.”
Kenny Li, co-founder and core developer of Manta Network — a privacy protection protocol — told Cointelegraph that the Treasury Department’s decision to sanction Tornado Cash was far-fetched and extreme, despite having affected specific individual crypto wallet addresses in the past were for the same treatment. But in most cases, he said, there is a clear case of fraud, hacks, or a Ponzi scheme:
“In this case, smart contract addresses will be blacklisted. Smart contracts are not people. Additionally, people forget that Tornado Cash is a protocol, not a person or organization, meaning it will continue regardless of the sanctions. It is time we realized that privacy and anonymity are not the same and Web3 is all about privacy.”
On the topic of people moving their USDC to other stablecoins after Circle’s decision to ban Tornado Cash wallet addresses, Li noted that the number of platforms blacklisting wallet addresses managed through Tornado Cash has sadly increased has increased.
He noted that the move was due to Circle’s status as a regulated platform, which requires it to comply with any sanctions imposed by any government agency that has jurisdiction over it.
Finally, he believes Circle’s actions to block the movement of millions of dollars worth of USDC could potentially stunt innovation in this space. Li concluded:
“No one wants their funds blocked, especially for activities they are not involved in. However, there is no certainty that tomorrow Tether will not block addresses that have touched Tornado Cash. Ultimately, this Treasury action is likely to have a domino effect, most of which is yet to be felt.”
Pending human rights violations?
One aspect of Pertsev’s detention that has attracted public attention is that he has reportedly been denied visits of any kind since his arrest, including visits from his wife Ksenia Malik.
In a recent correspondence with Cointelegraph, Malik said, “He is being held in prison as if he were a dangerous criminal,” despite simply “writing open-source code.”
As the Dutch authorities continue to ban all outside contact – not even “a quick phone call” – several rallies are being organized to support him. Decentralized finance aggregator 1inch tweeted that the arrest would set a dangerous precedent, one that could potentially “kill the entire open-source software segment” if developers continue to be held accountable for any abuse resulting from the software they create .
1/ Is it really a crime to be an open source #blockchain developer these days ⁉️
Stand up for the right to build open source software!
Help Alex Pertsev get out of prison!
Sign the petition: https://t.co/r5sdHaYKCN#FreeAlex #OpenSourceNotACrime #DeFi
Why is it important⤵️ pic.twitter.com/CqqD4Ds8AQ
— 1 inch network (@1inch) August 18, 2022
Despite the sincere sentiments of the open source developer community, it is pertinent to highlight a recent report by blockchain security platform SlowMist, which found that about 74% of all funds raised in the first and second quarters of this year came from the Ethereum network stolen found their way to Tornado Cash, with researchers noting:
“The platform accounts for most of the initial funding for these security incidents. There have also been reports of withdrawals from exchanges, trading platforms and personal wallets to fund these security incidents.”
Finally, it is worth noting that despite the lavish public support for Pertsev, his arrest was not entirely disapproved of by members of the global financial arena. For example, venture capitalist Kevin O’Leary explained in a recent interview that platforms like Tornado Cash — touted as “privacy tools” — have created a culture where it’s okay to tamper with federal regulations.
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In his view, Pertsev’s arrest was necessary and it is okay to have “sacrificed” him as he believes this will help introduce a high level of stability to the market in the long term.
As such, it will be interesting to see how legal issues like this continue to be addressed by regulators around the world.
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