In sanctioning what is called “the well-known virtual currency mixer Tornado Cash” on Friday (August 8), the Ministry of Finance began what could be the beginning of a more aggressive push to lift the veil of secrecy that many of the cryptocurrency industry has. back
Office of Foreign Assets Control (OFAC) sanctions Tornado Cash to settle claims that it played a role in laundering more than $7 billion in virtual currencies since its creation in 2019, including more than $455 million allegedly stolen by the Lazarus Group, a North Korean-sponsored hacking group sanctioned by the US in the same.
Some bitcoin and ether wallet addresses are also banned, prohibiting financial institutions – including crypto exchanges – from doing business with them. Americans are prohibited from using the Tornado Cash service.
Crypto mixing projects are generally decentralized finance (DeFi) platforms that allow people to disguise the origins of cryptocurrencies like bitcoin and ether, which can be traced from one transaction to another through a public key code.
Mixers use a variety of techniques, especially bundling a group of cryptocurrency users registered together to a single wallet address and then return randomly in small groups so that it is not clear who put a particular token.
Specifically, OFAC cited more than $96 million stolen in the June 24 hack of the Harmony blockchain’s Horizon cross-chain payment bridge, and $7.8 million from the $190 million Nomad bridge hack on August 1 – both believed to have been orchestrated by the Group Lazarus.
This is the second sanction for a blending service by OFAC, following May 6 register of the blending service Blender.io after the Lazarus Group allegedly used it to launder funds from a previous hack.
While notable in its own right, the second action in three months suggests that the government may do more to crack down on mixing services and other tools that crypto owners use to turn cryptic tokens into something completely anonymous and untraceable.
See the rest: As Money Laundering Booms, Crypto Thieves Flock to DeFi
Cryptocurrencies are called pseudonymous because the public key makes it easy to track transactions from A to B to C, but the use of a private key is all that is needed to start users placing transactions behind a pseudonym – which sounds like splitting hairs, until your husband allegedly bought $500 Walmart card that the authority said they can tie for $4.5 billion worth of crypto stolen from the 2016 Bitfinex hack.
However, this action also suggests that OFAC’s broader push to bring crypto fully into the world’s financial system — as a way to make payments that don’t go through trusted third-party financial institutions — is ultimately designed to bypass them.
Most focus on the costs and delays caused by these third parties, but they are also relied on for the most basic surveillance of financial crimes ranging from tax evasion to drug money and terrorist financing.
It is quite difficult with currencies that by default hide users behind cryptographic pseudonyms, but there are still many virtual asset service providers (VASP) – to use the term Financial Action Task Force – like exchanges.
But DeFi, in theory, removes the human third party that has to be responsible. Add in decentralized services designed to actively prevent surveillance and tracking, and you have a problem authorities can’t ignore. This is one of the reasons why crypto is still not trusted as a payment tool and is shunned by many financial institutions: It is still seen as a criminal currency in many regulatory and law enforcement circles.
Lack of Supervision
The impact on Tornado Cash was immediate – the government token TORN nosedived almost 25% when the sanctions were announced. Like other mixing services, Tornado Cash is completely decentralized, founder Roman Semenov toward CoinDesk in January.
“There’s not much we can do in terms of helping the investigation because the team doesn’t have much control over the protocol,” he told CoinDesk. “The Tornado Cash team usually does research and publishes the code to GitHub. All deployments, protocol changes and important decisions are made by the community through Tornado Governance.
On May 18, 2020, the developers had a Trusted Setup Ceremony where the original developers burned the key code that would give them control over the DeFi platform, and it was turned into a smart contract and voice by TORN token holders, CoinDesk. said at the time.
related: DeFi Series: Unpacking DeFi and DAOs
Along with banning US people from using the Tornado Cash service, the sanctions make providing any service – like coding – or government voting prohibited and making the TORN token illegal.
A Bridge Hack Too Much
The libertarian segment of the crypto industry reacted with outrage, calling the sanctions an unreasonable overreach that restricts the privacy of Americans.
Industry think tank Coin Center Executive Director Jerry Brito and Research Director Peter Van Valkenburgh criticized action, said that they are still “looking at the legal and constitutional ramifications,” and sanctions can amount to “mostly unconstitutional” restraint before free speech.
Arguing that sanctions are aimed at targeting people, decentralized mixing services are “a tool that is neutral in nature and can be used for good or bad like any other technology.”
By targeting, he said, OFAC has imposed “restrictions on Americans who want to use their own money and the software available to protect their own privacy — including for legal and personal reasons.”
Semenov tweeted that the account on GitHub, a popular site for coders and developers building cryptocurrency projects, has been suspended. The Tornado Cash website is also down.
“Is writing open source code illegal now?” said.
Muneeb Ali, the well-known developer of the Stacks blockchain, bitcoin’s scalability layer 2, tweeted, “crypto war II begins.” He added that the Treasury Department’s sanctions list “is for people, not technology tools. Privacy tools are for every American.”
Not everyone agrees.
CoinDesk said Ari Redbord, head of legal and government affairs at blockchain intelligence firm TRM Labs, called the sanctions “the largest and most effective action by the Treasury to date in the crypto space.”
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