In a recent move, U.S. officials began taking action against the creators of the cryptocurrency mixing service, Tornado Cash. This decision comes shortly after a U.S. federal judge affirmed the government's right to impose sanctions on them.
Roman Semenov, a Russian national and one of Tornado Cash's three founders, faced sanctions from the Treasury’s Office of Foreign Assets Control. The sanctions were due to his alleged ties with the North Korean hacker group, Lazarus Group, among other accusations.
On the same day, the Justice Department revealed charges against Semenov and another co-founder, Roman Storm of Auburn, Washington. The charges include conspiracy to launder money, running an unregulated money-transmitting enterprise, and more. Federal agents apprehended Storm in Washington, while Semenov is currently thought to be in Dubai.
What is Tornado Cash?
Services like Tornado Cash blend different digital currencies, some of which might be unlawfully acquired, to hide the source of illicit funds. In 2022, Tornado Cash faced sanctions for allegedly laundering a vast amount of cryptocurrency since its inception in 2019.
According to the Justice Department, the service enabled over $1 billion in suspicious transactions, with a significant portion linked to the Lazarus Group. This group's illegal activities are believed to fund North Korea's nuclear and missile endeavors.
Furthermore, Tornado Cash's systems were reportedly used in laundering over $96 million from two significant crypto thefts in 2022. Both Semenov and Storm also face charges related to the sanctions on Tornado Cash. Brian Klein, Storm's attorney, expressed disappointment over the charges against his client, emphasizing the potential implications for software developers.
This crackdown follows a ruling by U.S. District Judge Robert Pitman in August, which confirmed the Treasury's right to sanction Tornado Cash. The crypto community had previously challenged these sanctions, fearing they might restrict Americans from using privacy-focused software.
Another Tornado Cash co-founder, Alexey Pertsev, was arrested in the Netherlands in 2022 on money laundering allegations. Representatives for Semenov and Pertsev have yet to comment. In a related development, the U.S. sanctioned North Korean crypto mixing service Blender.io last year, accusing it of assisting the Lazarus Group in a massive digital currency theft.
What are Crypto Mixers?
Known as cryptocurrency mixers or Bitcoin mixers and often referred to as tumblers or blenders. These are services designed to enhance the privacy of cryptocurrency transactions. They achieve this by blending potentially identifiable cryptocurrency funds with others, obscuring the original source of the funds.
How Mixers Operate
The process begins when a user sends their cryptocurrency to the mixer's address. The service then shuffles these coins with others, either from different users or from its own reserves. After a certain delay, the mixer returns an equivalent amount of different coins from a large pool to a new address provided by the user. This ensures that the returned coins are not the same as the ones deposited, thereby breaking the chain of traceability.
Potential Uses and Controversies
Mixers have both legitimate and illicit use cases. On the legitimate side, they cater to users with genuine privacy concerns. For instance, to prevent someone who knows their wallet address from tracking all associated transactions. However, on the flip side, mixers can be tools for money laundering or hiding proceeds from illegal activities. This dual nature has led to regulatory scrutiny and challenges.
Risks and Alternatives
Engaging with mixers is not without risks. Users must trust the mixer with their funds, and there's always a possibility of encountering dishonest services that might abscond with the deposits. Additionally, while mixers aim to enhance privacy, advanced blockchain analysis can sometimes trace back mixed transactions. For those seeking inherent privacy, cryptocurrencies like Monero and Zcash offer built-in features that negate the need for external mixing services.