Yesterday, the U.S Treasury banned Tornado Cash. More specifically, all Ethereum addresses associated with Tornado Cash were put on the sanctions list. Those addresses cannot do business with anyone in the U.S.
What is Tornado Cash?
It's a mixing service. It allows users to conceal the source of their funds when doing a transaction, in exchange for a small fee. So for example, you can move Ethereum from one wallet to another and break the transaction history, if you are using Tornado cash.
It's Perfect for...
Your first thought is correct... this service is used widely by money launderers. For example, after the Ronin hack, the hackers used Tornado Cash. In fact, Chainanalysis claim that in every single hack linked to North Korea (like the Ronin hack), Tornado Cash was used to launder funds. This is the main reason US regulators are cracking down on the service
1/ According to our analysis, Tornado Cash has been used to launder funds from every hack conducted by North Korean-linked hackers this year. twitter.com/USTreasury/sta…
— Chainalysis (@chainalysis)
Aug 8, 2022
What does this mean for Privacy?
The idea behind Tornado Cash (and other mixers) is to allow privacy for its users. Among a certain percentage of the userbase, this privacy is certainly misused. But the service can be used for any number of reasons.
To give an example, if you live in a country where abortion is banned and you are looking to get one, at some stage you might be looking to make a transaction that can't be traced.
Many have seen this move by the US regulators as anti-privacy. There are privacy advocates who strongly believe that there should a right to online privacy, and this includes online commerce.
A Blunt Sanction
Usually, it is individuals and organisations that are sanctioned. In this case, a tool (some open source software) is being sanctioned.
US regulators have cited national security as a reason for this policy move.
"These hacks are more than hacks; they’re serious national security risks.’ It’s not just money laundering – it’s money laundering that’s going to be used for weapons proliferation.”
But it's difficult to see how banning US users from using Tornado cash will have any impact on hackers in other countries.
What happens to other privacy-based coins like Monero? Will other countries follow suit and ban mixers like Tornado Cash? The spillover effects of this are yet to be felt but it's clear they will be very important to the future of web3.