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Tornado Cash founders charged by US federal courts

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On August 23, the US Department of Justice filed charges against the two founders of Tornado Cash. Roman Storm was detained in Washington State; Roman Semenov is now at large and was being charged in absentia.

This announcement is just a continuation of regulatory pressure on Tornado Cash. To fully understand what happened, let's look at what Tornado Cash is, how it works, and why it did not please the US regulators.


What is Tornado Cash

Tornado Cash is a protocol for anonymising transactions launched on Ethereum in 2019. The developers behind the project are Alexey Pertsev, Roman Semenov, and Roman Storm.

A protocol on Ethereum is a set of rules or standards that define how specific operations or processes should occur on the Ethereum blockchain. In simpler terms, it is like a batch of guidelines for building and running applications or programs on Ethereum.

Currently, the protocol operates on seven networks, including BNB Chain, Arbitrum, Polygon, Optimism, etc. However, Ethereum remains its focal point. The developers have made the protocol in a way that even they cannot change or stop smart contracts. Thus, these smart contracts work as long as the underlying blockchain remains functional.

Learn the main on-chain metrics of the project on Dune.

How does Tornado Cash work

Without delving too deep into the technical description of the protocol and the zk-SNARK technology that powers it in this article, check documentation on the project’s website.

Instead, let's see how the anonymisation of transactions in Tornado Cash operates:

🛫 From address A, you transfer your crypto to a special smart contract. The protocol works pools for six assets: ETH, DAI, cDAI, USDC, USDT, and WBTC.

🥷 After sending your crypto, a special key is generated. It is needed to distribute funds to any other address.

🛬 Then, you connect to the protocol using address B. You present the key to it and receive funds from the smart contract to a new wallet. This breaks the connection between wallets A and B.

This procedure reveals that address A deposited money into the Tornado Cash smart contract, with address B receiving funds from the same source.

The project also had its own token, TORN, which facilitated participation in the DAO and received a part of the funds passing through the pools. TRON’s harsh fate can be seen on the chart below. Since August 2022, when the main pressure on the protocol began, the token’s price has been in a downtrend, dropping from $25 to the current $2.6. According to CoinMarketCap, the token reached its all-time-high (ATH) of $437 on February 13, 2021.

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Who was interested in transactions anonymisation

Since 2019, Tornado Cash has witnessed 164,586 deposits from 12,247 unique users through its smart contracts.

In addition to hackers withdrawing stolen funds through Tornado Cash, this protocol may be interesting to people seeking privacy while transferring their money on a publicly-open blockchain.

Notably, Tornado Cash has been more than once recognised by Vitalik Buterin, who wrote about its utility on Twitter.


Regulatory concerns surrounding Tornado Cash

Anyone can use the protocol, and the developers do not have access to managing the smart contracts storing the funds. The protocol's website lacked any Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.

Considering the large sums involved, some of which are malicious gains, regulators could not restrain from overlooking this situation. Potentially, the protocol could experience problems with pools that allowed anonymous transfers of USDT and USDC. As known, the issuers of these stablecoins can freeze tokens at any time upon regulatory request, wherever those tokens may be.

Interestingly, Circle froze all USDC contracts related to protocol later, while Tether said it would not do so without a special request from the US authorities.

In August 2022, regulatory scrutiny on the protocol began. Here are the highlights of the key events:

1. On August 8, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned the  smart contract addresses and wallets associated with Tornado Cash. Moreover, citizens and organisations in the United States faced liability for using the service. As noted in the OFAC press release, Tornado Cash "has been used to launder more than $7 billion worth of virtual currency since its creation in 2019".

2. On August 9, repositories with the project's code, developer accounts on GitHub, the project's website, and more were blocked all over the world. Later, GitHub partially restored access to the project's code, while the protocol maintained a presence on other sites. 
Be careful if you want to visit it as there is a risk of getting a phishing version. A reliable version is listed on CoinMarketCap.

3. On August 12 2022, one of the developers, Alexey Pertsev, was detained in the Netherlands. At the moment, he is under house arrest. The next trial on his case is scheduled for 2024.

These challenges are far from being the whole list of problems Tornado Cash has already faced. As a result, the protocol has seen a sharp decline in user engagement, with the amount of ETH within Tornado Cash contracts being halved from a peak of 230,000 coins to the current 120,000.

Latest news

Just over a year later, regulators have struck again. On August 23, the US Department of Justice charged Roman Storm and Roman Semenov with conspiracies involving money laundering, violating sanctions, and conducting an unlicensed money transfer business.

Furthermore, according to the press release, Tornado Cash "facilitated more than $1 billion in money laundering transactions and laundered hundreds of millions of dollars for the Lazarus Group, the sanctioned North Korean cybercrime organisation".

The Lazarus Group is a group of hackers believed to be controlled by the North Korean government. They have been involved in large crypto hacks, including the $600 million Axie Infinity hack in the spring of 2022.

Both developers could face up to 45 years in prison. Roman Semenov is presently at large in Dubai. The trial date is not known yet.

On August 24, Roman Storm's lawyer, Brian Klein, announced that his client had been released on bail. The lawyer is also disappointed that the prosecutors are charging him.


Reaction to the Tornado Cash case

The pressure on Tornado Cash has greatly impressed the crypto community. In 2022, when Alexey Pertsev was arrested, there was a small protest in the Netherlands in favour of the developer's release.

In general, when talking about this case, a common line of defence is as follows: it is incorrect to accuse open-source software developers for the fact that others use this very software for illegal purposes.

Peter Van Valkenburgh, a representative of the Coin Centre, non-profit organisation focused on the policy issues facing cryptocurrencies, echoed this point of view. He analysed this accusations and said that neither Roman Storm nor Roman Semenov provided money transfer services. Valkenburgh referred to a fragment from the Financial Crimes Enforcement Network (FinCEN) guidance on virtual assets from 2019: "An anonymizing software provider is not a money transmitter".

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Maria Kachura
Maria Kachura

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