10th August 2022 > > Tornado Cash.

tl;dr

The shuttering of Tornado Cash raises questions about the extent of law enforcement in the decentralised world.

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Curious Cryptos’ Commentary – Tornado Cash

The Office of Foreign Assets Control (OFAC) has announced that it has sanctioned Tornado Cash, claiming that North Korea has laundered hundreds of millions of dollars from hacks of crypto projects, and has used those proceeds to fund its weapons programmes.

The OFAC is not alone in hoping that North Korea, and its narcissistic madman of a leader Kim Jong-Un, who remarkably is even more self-obsessed than my soon to be ex-wife, fails in its stated ambition to develop the technology to produce and launch nuclear weapons.

This step of sanctioning raises some interesting questions, but first let us understand exactly what Tornado Cash is, and what it does.

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The second of those two questions is the easier one to answer.

Tornado Cash is a crypto mixer for Ethereum. Every single ETH transaction is recorded for public display on the blockchain. As an example, this public address (aka public key) shows three receipts of ETH, and no withdrawals:

https://etherscan.io/address/0x1dEF2293533Bc499989D0624369a93CDd0c2373a

That’s the kind of diamond hand that gets the CCC seal of approval.

It is possible to trace back those three transactions, with just a few clicks, to determine that the funds were originally sourced from Coinbase. Coinbase is a centralised exchange that is a public company – it adheres diligently to Know Your Customer (KYC) and other anti-money laundering (AML) regulations.

If law enforcement agencies, or indeed the taxman, had cause to need to know more about the fiat source that purchased this ETH on Coinbase, that information is available to them.

A whole industry has grown up around the possibilities of analysing the blockchain and its transactions. Anonymity is far from guaranteed.

This is the motivation for the invention of mixers – and Tornado Cash is just one of many.

The intention of a mixer is to receive cryptos from a wide variety of sources, mix them all up (as any one ETH is fungible with any other ETH), and redistribute to a different set of wallets. With a large enough population of inputs, it becomes nigh-on impossible for even the most dedicated analyst to determine the precise source of funds in any of the output wallets.

It is blindingly obvious that such a facility is very useful for drug dealers and money launderers, just as the EUR 500 note and the USD 100 note are both very useful for drug dealers and money launderers.

But just as not all users of cash can be assumed to be criminals, not all users of crypto mixers are using them for nefarious purposes, though I do concede that it would not be surprising if the proportion of criminal use of mixers is somewhat higher than the proportion of criminal use of cash.

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Tornado Cash is – or rather was – a piece of open-source code stored on Github. It has since been removed following the sanctions announcement.

The code was a smart contract that could be deployed by anyone, but note that the greater the number of users, the more effective it is in obfuscating the source of funds. The website that was initially created to allow easy use of the code has of course now been taken down.

But the magic of the WayBack Machine allows us to see what it used to look like – just click on “Check for saved version” when this link tells you “This page isn’t working”:

https://tornadocash.eth.limo/

You will be taken to this screen:

I do like the late 70s Commodore Pet feel to the colours and font of the Tornado Cash interface. If you are unfamiliar with the dawn of home computing, this is what one iteration of a Pet looked like:

When I first started using these beauties, long before Windows was conceived, programs were loaded from a cassette deck and launched using command lines in the original MS-DOS, a perfectly fine way of playing Colossal Cave Adventure and probably the only time that the doggerel “Richard of York gave battle in vain” was ever useful. Them were the days.

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Tornado Cash Is not the first mixer that the authorities have taken down.

In 2021 Roman Sterlingov was arrested for money laundering for operating Bitcoin Fog, a mixer deployed on the darknet, and aimed squarely at a client base composed of criminals operating in that space. I believe that this case is still ongoing.

Also in 2021, Larry Dean Harmon – developer of the mixer Helix – pleaded guilty to charges of conspiracy to launder money and is spending the next two decades in jail.

Chainanalysis estimates that $1.2 billion of illicit funds have been mixed by Tornado Cash. Prior to being taken down, the Tornado Cash website claimed to have received deposits of about $3.5 billion of funds, at current prices. Blockchain tracking firm Elliptic claims that more than $1 billion of those funds came from thefts and hacks.

One might assume that the developer of Tornado Cash – Roman Semenov who runs a cybersecurity firm called PepperSec – might well be a worried man. However, no action has yet been taken against him. It is possible that the reason for this is explained by a comment in the Tornado Cash Telegram channel back in April:

“Tornado cash is a privacy protocol. The design of Tornado Cash means that it's uncensorable, permissionless, and completely trustless. Tornado Cash as a project has no special knowledge of who is using the dApp [decentralized application]. There are no admins with a special ability to investigate transactions. Nor can anyone stop someone from using the protocol."

Of even greater relevance is that Bitcoin Fog and Helix were both custodial services, taking fees for their services. Neither of these two characteristics apply to Tornado Cash.

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Once again, we have here a clash between the centralised world and the decentralised world.

Law enforcement agencies are rightly muscling in on the decentralised world, but by not arresting or sanctioning Roman Semenov himself, they appear to be implicitly accepting there are limitations to their ability to enforce the rule of law in the decentralised world.

These are issues that lawmakers need to start addressing, and with urgency.