Tornado Cash Penalties: What Crypto Investors Need to Know

Tornado Cash Penalties: What Crypto Investors Need to Know

In August 2022, the US Department of the Treasury’s Office of Foreign Assets Control – also known as OFAC – imposed sanctions on Tornado Cash, a crypto-scrambler that mixes funds together to make its sources more difficult to trace. Virtual currency mixing services can be used to launder stolen money, and the US Treasury says Tornado Cash has processed more than $500 million from numerous hacks and thefts online. The penalties are as follows:

  • Any assets currently in Tornado Cash are frozen.

  • Transactions to and from Tornado Cash are prohibited.

  • The mixer icon itself is prohibited (although it is impossible to turn off the technology).

But while the sanctions were aimed at money laundering, some crypto enthusiasts feel that OFAC is overstepping its authority by sanctioning digital assets rather than a person or institution. Critics of the sanctions are concerned about their implications for the privacy of cryptocurrency users and possible future shutdowns. In September, six individuals challenged those sanctions by filing a lawsuit, funded by crypto exchange Coinbase, against the US Treasury.

Here’s what to know about cryptocurrency mixers, and what these government sanctions might mean for your future investments.

Cryptocurrency mixers, also known as mugs or mixers are designed Actions on the blockchain More private by merging data together from separate transactions. This prevents anyone from being able to trace the source of a particular asset, essentially making transactions anonymous.

Mixing services charge a fee of typically 0.25% to 3% of the amount sent via the blender. Although they can be legal if recorded correctly, they have made headlines for their use in money laundering and other cybercrime.

Tornado Cash, for example, is one of the first decentralized applications on the Ethereum blockchain to offer private transactions and allegedly “shuffle” millions of stolen funds from multiple online thefts. One of the largest thefts that moved money through the blender was led by a hacking group sponsored by the Democratic People’s Republic of Korea that was sanctioned by the US Treasury in 2019.

According to a July 2022 report from blockchain analytics firm Chainalysis, mixer usage is at an all-time high, with 23% of funds sent to mixers from addresses linked to illicit activity.

What are the penalties and how are they applied?

OFAC imposes economic sanctions—sanctions that act as a deterrent to prohibited activities—on certain countries, individuals, and business entities. The latest penalty against Tornado Cash is based on the listings, which calls for a ban on assets in the entity’s possession and prohibits transactions with any associated actors.

OFAC has specific guidance on penalties for virtual currencies. In particular, anyone with a banned cryptocurrency must report the asset to OFAC within 10 business days of the coin being banned and deny access to anyone else (so no sale or trade). If you want to withdraw funds, you will have to apply for special permission from OFAC.

In the case of Tornado Cash, as of August 8, 2022, US users are no longer allowed to send any assets through the mixer – or retrieve any money stuck on the platform – without special permission from the US Treasury. OFAC noted that it would look positive Applications from users They are looking to withdraw their money.

How have cryptocurrency issuers and platforms responded to the sanctions?

  • In compliance with government sanctions, the circuit, issuers of USDC – A stablecoin Pegged to the US Dollar – Freeze over $75,000 of assets on the platform.

  • developers rope (USDT)another US dollar-based stablecoin, has issued a public statement that it will not freeze all accounts linked to Tornado Cash, and will await an official direct request from OFAC.

  • exchange platform Queen Piece It is funding a lawsuit against the US Treasury over the sanctions, claiming that the Treasury has overstepped its authority by banning the program rather than just individual actors.

I do not use Tornado Cash. Could this affect me?

For the majority of users, sanctions at this level will not affect their investment, but it does indicate the possibility of closing other crypto platforms used for money laundering.

Currently, Decentralized Finance, or DeFi, Apps like blenders work more like the Wild West than Wall Street. They are supposed to operate without intermediaries, but the lack of internal regulation can expose such platforms to abuse and possibly make them a target of government regulations or sanctions.

Since Tornado Cash runs on the Ethereum blockchain, these events also have the potential to affect Ethereum as a whole. If the government required Ethereum auditors to block blacklisted Ethereum addresses, for example, and the majority of validators complied, that would effectively make Ethereum more regulated. So far, the government has not made this request, and it is not clear whether the majority of auditors would comply if it did.

How do I make sure that my crypto assets are not affected by sanctions?

“Make sure the products you invest in are from vetted and regulated providers,” says Catherine Dowling, chief compliance officer at Bitwise Asset Management.

It may be tempting to use services that promise high returns or total privacy, but these platforms are not without risks. In the decentralized environment of cryptocurrencies, it is especially important to invest in products with a clean track record. Penalties for violating OFAC sanctions can range from a warning letter to a hefty fine or even a criminal investigation.

However, it is impossible to predict whether the service will be used by illegal means. Sanctions compliance isn’t always under your control, either: the day after Tornado Cash was penalized, an anonymous user sent small transactions from the mixer to high-profile Ethereum accounts, all of which were unable to block the transfers.

OFAC said it was aware of this practice, known as dust removal, and would not prioritize enforcement against such recipients. But if you are a recipient, you must decline or block the transaction by Submit a report with OFAC within 10 working days.

What does this mean for cryptocurrencies?

When Tornado Cash was penalized, the government seized all of its addresses and froze the assets associated with it, potentially setting the standard for future government crackdowns on cryptocurrency.

“We will continue to see points of tension between privacy and national security interests,” Dowling says. “But we will have to create better tools to deal with abuses.”

Until there are better tools to regulate products like Tornado Cash, government safety measures aimed at targeting illegal activity could affect innocent users of these products as well.

Neither the author nor the editor held positions in the above investments at the time of publication.

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