In May 2024, Alexey Pertsev, one of the founders and core developers of Tornado Cash, a 31-year-old Russian citizen, was sentenced to 5 years and 4 months in prison in the Netherlands for laundering $2.2 billion on the cryptocurrency mixer platform.
Prior to this, the U.S. Office of Foreign Assets Control (OFAC) announced the inclusion of Tornado Cash on the sanctions list, accusing it of aiding hackers and criminals in money laundering, including fund whitening activities related to the North Korean hacker group Lazarus Group. American users of Tornado Cash were prohibited from using the platform, and U.S. blockchain companies and projects were not allowed to trade or interact with Tornado Cash. The U.S. Department of Justice and other regulatory agencies (DOJ) have brought criminal charges against Tornado Cash founders Roman Storm and Roman Semenov, accusing the two of conspiring to launder money, violating sanctions, and operating an unlicensed money transfer business during the operation of Tornado Cash. The two face a minimum of 20 years in prison. Storm was arrested last year and will stand trial in September this year, while Semenov has not been arrested. The verdict of Pertsev is likely to determine the future trial results of the two Tornado Cash founders.
The unwelcoming attitude towards Tornado Cash and even law enforcement actions are not only from the Netherlands and the United States.
Germany - On August 20, 2022, the Federal Financial Supervisory Authority (BaFin) in Germany conducted an investigation into Tornado Cash, finding that it had failed to comply with anti-money laundering regulations and issued warnings and fines.
France - On September 5, 2022, the National Commission on Informatics and Liberty (CNIL) in France reviewed Tornado Cash's privacy policy, finding that it had failed to effectively protect user privacy and imposed sanctions.
Japan - On September 15, 2022, the Financial Services Agency (FSA) in Japan conducted a review of Tornado Cash, finding that it could be used for illegal activities and issued a warning letter, requiring it to improve anti-money laundering measures.
South Korea - On October 1, 2022, the Financial Services Commission (FSC) in South Korea blacklisted Tornado Cash, prohibiting South Korean citizens from using the service and investigating its potential money laundering activities.
Canada - On October 20, 2022, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) conducted an investigation into Tornado Cash, pointing out its money laundering risks and recommending strengthened regulation.
Australia - On November 1, 2022, the Australian Transaction Reports and Analysis Centre (AUSTRAC) monitored Tornado Cash, warning of its potential use by criminals for money laundering activities.
Why would a blockchain project be successively banned by multiple countries? Is it the disappearance of privacy or the decline of technology? In this article, lawyer Liu Honglin from Mancun Law Firm will take friends in the cryptocurrency circle to make some waves online.
What is Tornado Cash Mixer?
Tornado Cash is a decentralized mixing service based on Ethereum, which mixes users' deposits together through smart contracts and then redistributes them, making the source of funds untraceable. Tornado Cash was created by developers Roman Semenov and Roman Storm on August 6, 2019, with the aim of enhancing the privacy of Ethereum transactions, allowing users to send Ethereum cryptocurrency "100% anonymously." Core team members include Alexey Pertsev, who have rich experience in privacy protection and decentralized technology.
Since its launch, Tornado Cash has been continuously iterated and improved, introducing multiple versions, supporting different cryptocurrencies, and gradually becoming a well-known privacy tool in the cryptocurrency community. At its peak in July 2021, the Tornado Cash pool contract held over $700 million worth of ETH.
In simple terms, the operation logic of Tornado Cash is as follows: the deposit and withdrawal actions of a large number of users are mixed together. After depositing tokens into Tornado Cash, the depositor presents a ZK Proof to prove the deposit, and then withdraws the funds using a new address, thereby cutting off the association between the deposit and withdrawal addresses.
To break it down, the process is roughly as follows:
User deposits. Users deposit Ether (ETH) into Tornado Cash's smart contract, generating a secret note.
Mixing process. The smart contract mixes the deposits of multiple users together to form a fund pool.
Fund withdrawal. Users use the note to withdraw funds, and the withdrawn funds are not directly associated with the deposit address.
Tornado Cash is like a piggy bank, where 10 people simultaneously deposit $100 and receive a deposit certificate, and then 10 people simultaneously withdraw $100 using the certificate. Because the money itself is not named, we cannot accurately associate the depositor with the withdrawer. This is precisely what makes it difficult for governments and regulatory agencies around the world.
Regulatory Crackdown
Of course, it's not just Tornado Cash that gives headaches to government and regulatory agencies, but also multiple similar mixers such as CoinJoin, mixing services, and Wasabi Wallet. The cryptocurrency industry's innovation continues, and regulatory agencies are facing ongoing challenges.
In 2024, the U.S. Senate passed a revised version of the "Fiscal Year 2024 National Defense Authorization Act" (FY24NDAA) with a total budget of $886 billion, which includes a provision to strengthen the regulatory oversight of financial institutions engaged in cryptocurrency transactions and crack down on encrypted assets aimed at "increasing anonymity" for cryptocurrency mixers. The amendment was jointly introduced by Democratic Senator Elizabeth Warren and Republican Senator Roger Marshall, both well-known critics of cryptocurrency. Bill Hughes, a lawyer for ConsenSys, a Web3 infrastructure developer, called it "one of the most significant congressional actions on encrypted assets to date."
Why are regulatory authorities so highly focused on and continuously cracking down on mixers? There are several main reasons:
Anti-money laundering issues. Tornado Cash, due to its anonymity, has been widely used for money laundering activities. For example, the indictment issued by the Dutch judicial authorities accused Alexey Pertsev, the developer of this cryptocurrency mixing service, of participating in money laundering activities involving a staggering $1.2 billion. The indictment lists 36 suspected money laundering transactions on the Tornado Cash platform, including a transaction involving 175 ETH. This fund is believed to be related to the Ronin Bridge hack, which resulted in a loss of approximately $625 million on March 23, 2022, in one of the largest cryptocurrency hacks to date. Criminals used Tornado Cash for money laundering.
Terrorist financing. The anonymity of Tornado Cash is also exploited by terrorist organizations for secret fundraising activities. Law enforcement agencies are concerned that this anonymous transaction method makes it easier for terrorists to obtain funds without being detected. For example, in 2021, there was evidence that certain terrorist organizations raised large amounts of funds through cryptocurrency mixing services.
Sanctions evasion. Some countries or individuals use Tornado Cash to evade international sanctions by transferring funds through anonymous cryptocurrency transactions. For example, the North Korean hacker group Lazarus Group has been accused of using Tornado Cash to transfer funds obtained from cyber attacks, evading international sanctions tracking.
Cryptocurrency Players, Love and Hate
In contrast to government agencies, cryptocurrency players like mixers because they meet the desires of some users for privacy protection and the need for financial security.
Tornado Cash and similar mixers provide powerful privacy protection for users. For some high-net-worth players in the cryptocurrency circle, using mixers can prevent them from becoming targets of hacker attacks or extortion due to public transaction records. At the same time, some activists or journalists under high-pressure regimes need to use mixers to protect the sources and purposes of their funds from being discovered by governments or other organizations. Therefore, when the developers of Tornado Cash face charges, some people have specifically established a defense fund for them, and there are also well-known figures publicly supporting them. For example, former National Security Agency (NSA) whistleblower Edward Snowden publicly supported a legal fund for Tornado Cash developers Roman Storm and Alexey Pertsev, which has raised over $350,000.
Of course, everything has two sides, and not everyone who wants to hide their identity and tracks is a good person.
The most typical scenario is in cases related to virtual currency theft, where friends often turn to Mancun lawyers because their virtual currency has been stolen. After our on-chain analysis, if we find that the thief has used a mixer, we can't help but feel a sense of "it's over." Once cryptocurrency is stolen and mixed through a mixer, tracking and recovering the stolen assets becomes extremely difficult. For example, in the Ronin Bridge hack, the attackers used Tornado Cash to mix the stolen funds, making it almost impossible to track the flow of funds, ultimately leading to irreparable losses.
In addition to the risk of asset loss, from a legal and compliance perspective, the biggest risk for users of mixers is that using Tornado Cash and other mixers may violate anti-money laundering and counter-terrorism financing laws in some countries. Due to the focus of regulatory agencies on Tornado Cash and other mixers, once sanctioned or shut down, users' funds may be frozen or unrecoverable. For example, OFAC's sanctions have prevented many users of Tornado Cash from withdrawing their funds, resulting in significant losses.
Therefore, for individual players, before using any mixing service, it is important to understand and comply with the laws and regulations of their country to avoid legal risks associated with using mixers. It is also advisable to carefully choose reputable and secure mixing services and avoid using services that have been sanctioned or are controversial. It is also recommended not to invest all funds in a single mixing service. Diversification through multiple channels can help reduce risks. Any risks or issues should be addressed promptly.
In April 2023, the U.S. Department of the Treasury released an assessment report on illegal financial activities in DeFi, revealing potential risks in DeFi services and analyzing how criminals use these services for illegal activities. Three months later, four U.S. senators introduced the "Cryptocurrency National Security Enhancement and Enforcement Act," which aims to strengthen regulation in the areas of KYC, AML, and DeFi.
The "Cryptocurrency National Security Enhancement and Enforcement Act" provides a new framework for regulating DeFi, requiring DeFi to be regulated as other cryptocurrency institutions, and requiring anyone who can control the project to be responsible for it. The bill may also mention that if there is no specific person who can control the DeFi service, any investor who invests more than $250,000 in the project should be responsible for it.
For the technical developers of mixers, although decentralized technology services are neutral, your company and you as an individual are still part of the real-world country to which you belong. Therefore, it is recommended to ensure that the development and operation of mixing services comply with the laws and regulations of the country and region, strengthen platform security measures, prevent hacker attacks and fund theft, safeguard user funds, and avoid becoming targets of legal action.
Mancun lawyers remind
Tornado Cash is favored by many cryptocurrency users for its powerful anonymity and privacy protection features. However, it is precisely this anonymity that has made it a target for law enforcement agencies. In today's China, where helping to commit a crime has become one of the top three criminal charges, as cryptocurrency users and technical developers, while enjoying the convenience brought by technology, they should always remain vigilant and comply with laws and regulations. After all, in the dark forest law of the cryptocurrency circle, it's always better to be cautious.
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