The US Treasury sanctioned Tornado Cash and a number of associated wallet addresses yesterday. Tornado Cash is an Ethereum-based decentralized cryptocurrency mixer which allows users to obfuscate transactions, making the transaction private. While many cryptocurrency advocates believe mixers are a step forward for privacy, there is a serious downside to these mixers–they’re very effective at laundering illegally obtained assets, and avoiding tax obligations.
According to the US Treasury, Tornado Cash was used to launder over $7B of cryptocurrency. Some private analytics firms have this number pegged at roughly $1.5B. This is primarily proceeds of crime such as ransomware, hacks, and fraud, according to a spokesperson from Elliptic, a crypto analytics platform. Of note, it’s been reported that North Korea has taken billions in cryptocurrencies via hacks.
What this really means is that the Treasury is taking aim at crypto privacy. While the government publicly has been focused on this via the funds resulting from large scale hacks, there is a real concern about taxes. It’s not a surprise to anyone that many people aren’t paying their taxes on crypto gains, in part because of how easy it is to avoid tax obligations. For the normal person, the pipeline to making your currency entirely anonymous was as easy as: buy on Coinbase, transfer to a MetaMask wallet, using tornado cash, transfer that Ethereum to a new wallet. Suddenly all of the Ethereum in the wallet is disconnected from you.
Many large wallets associated with Tornado Cash were also sanctioned, and USDC immediately froze their funds. Github also suspended the contributors to Tornado Cash.
The truth is that this problem isn’t going away for the US Treasury, but this does go a long way to build some credibility in the system. There are many other mixers, and privacy coins such as Monero still exist, which can be used to create clean wallets.
Tornado Cash Strikes Back
Just now, someone took counter measures by performing what is being called a “dusting attack.” A dusting attack is when someone sends tiny amounts of a token to a large number of people. This was clearly done to create an association between the project and many random wallets.
It seems like these transactions are targeted at high profile people, including Jimmy Fallon, Brian Armstrong, etc.
It’s yet to be seen what will come of this, but either way, a lot of people just got roughly 0.1 ETH as a political counter-measure.