The US sanction against Tornado Cash has now made the rounds and is now household news. The sanction against the famous Coin Tumbler has been coming for some time, which was not at all expected when it happened due to its connections to bad actors who have stolen billions of dollars from investors. However, as more information emerges about the sanction, it becomes clear that this may not be good news for investors in the space.
The legal precedent
Now, many people know that the Tornado Cash sanction happened, but they don’t know where from. This sanction came directly from the Office of Foreign Assets Control (OFAC), which is responsible for sanctioning countries and foreign companies that the US government considers to be enemies of the state or major criminals. Just as transactions with any country or entity sanctioned by OFAC are illegal, transactions with Tornado Cash or funds related to it are illegal.
With the sanction had come a number of wallets that were also sanctioned and allegedly belonged to Tornado Cash. These wallets cumulatively contained more than $430 million and any dealings with any of these wallets is now a criminal offense under US law.
The sanction was the result of funds stolen by South Korean hackers, which were traced to Tornado Cash. It had become the preferred service to clean up and recirculate ill-gotten funds in the crypto space without being traced back to the hackers.
USDC remains stable despite US sanctions | Source: USDC/USD on TradingView.com
Circle, the company behind USDC, has now had to freeze the USDC held by some wallets and cannot redeem those coins or risk being penalized under US law.
So where is Tornado Cash going?
There is much speculation as to what a platform like Tornado would do with its coins after the sanction was imposed. One possible place the coins could do is in liquidity pools. In the end, the liquidity pool holders would be the ones who end up with tainted USDC that they can never redeem. This threatens the decentralized exchange structures that rely on pools of liquidity to facilitate trading between two or more parties.
Other possible outcomes of this sanction would be stablecoins like DAI. Now, this stablecoin has the bulk of its reserves in USDC, and with the government cracking down on Circle, any action taken against USDC would have a direct impact on DAI, raising fears of destabilizing another stablecoin. So this would also have a profound impact on the crypto market as a whole, an example being the UST crash earlier this year.
For US citizens, residents and businesses, the impact is even broader. This means they cannot interact with Tornado in any way, be it by working, downloading/running their software, or Gitcoin donations. It also extends to depositing and withdrawing funds from smart contracts, as well as visiting the website.
Featured image from GoBankingRates, chart from TradingView.com
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