US Treasury Blocks Tornado Cash and Freezes User Funds

The US Treasury has begun freezing funds linked to Tornado Cash, an Ethereum coin mixer. On top of that, it has completely banned Americans from using Tornado Cash.

Circle, the issuer of USDC, has also blacklisted Tornado-related addresses and has frozen at least 75,000 USDC so far.

Tornado Cash-related accounts and amounts frozen by USDC issuer Circle

Why did the Treasury act?

The US Treasury concluded that Tornado Cash is being used illegally for money laundering. As key examples, it pointed to the North Korean hacking group Lazarus as well as the laundering of funds from the recent Nomad bridge hack, roughly $8 million.

According to data from The Block, funds in the Tornado Cash pools have grown sharply since the 2021 bull market. This can also be read as a sign that money laundering has grown just as much.

Tornado Cash explained

Tornado Cash is an Ethereum-based service that uses zero-knowledge proofs to obscure users' transaction activity. On a blockchain, every transaction record stays tied to a wallet forever, so sometimes a single transaction can leave your privacy exposed from then on.

For example, it's like making just one card payment and having your bank balance and all your later transactions exposed as a result. Using Tornado Cash makes this kind of transaction activity hard to trace, which lets you keep your privacy.

How Tornado Cash works

Like other DeFi protocols, Tornado Cash runs on smart contracts. In other words, it uses an automated program to make it hard to identify who is behind a transaction.

How has the crypto industry reacted?

In response to the sudden sanctions, some crypto leaders pushed back, calling it an inappropriate decision and saying the move itself is illegal. Others, however, argued that tools for money laundering like this should naturally be sanctioned.

My personal take

Personally, I think it makes sense for the government to take sanctions like this. Catching dirty money is essential to keeping the current economy running.

In reality, though, sanctions like these can be easily bypassed in the end. In fact, the Tornado Cash team even published a new URL. I don't think there's any practical way to stop a program that runs on smart contracts without any human intervention.