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Home Blog decentralized protocols for mixing cryptocurrencies are under the radar. U.S. Treasury ban tornado c
Article by Yunis
16 August 2022 (Updated 27 November 2022)

First time in the history, a state department took steps and banned a decentralized protocol. Debates are running around the place of codes in the law. Will codes be treated under freedom of speech?

Decentralized protocols for mixing cryptocurrencies are under the radar. U.S. treasury took steps and banned Tornado Cash protocol which is a smart contract.
US Treasury ban Tornado Cash! logo
  • The U.S. Treasury added Tornado Cash and 44 other Ethereum and USDC wallet addresses to its Specially Designated Nationals (SDN) list .
  • Tornado Cash is a crypto mixer application running on the Ethereum Blockchain as a smart contract.
  • Coin Center and The Electronic Frontier Foundation (EFF) may fight against the decision.
  • The argument against the decision is classifying codes as speech and treat them under the freedom of speech.

The U.S. Treasury added Tornado Cash and 44 other Ethereum and USDC wallet addresses to its Specially Designated Nationals (SDN) list on August 8. Specially Designated Nationals, known as SDN, is a list targeting, defining and preventing individuals and companies that act against U.S. national interests and get involved in terrorist, international criminal organizations or ties to authoritarian regimes. The Office of Foreign Assets Control (OFAC) is an agency working as a branch of the U.S. Treasury Department.
 
U.S. Department ban on a decentralized protocol made a big noise and provoked crypto advocates. This is the first time the U.S. government has taken action against a piece of code. Because the Tornado is not a person nor a company, it is a decentralized application running on a blockchain.

What is Tornado Cash?

Tornado Cash is a cryptocurrency mixing service, working indefinitely on the Ethereum blockchain as a smart contract. You send crypto funds to the system from a wallet and receive the same amount of funds to another wallet. The system mixes many different transactions, creates bundles, and sends them to targeted addresses. The purpose of the system is to create untraceable transactions. When the funds are transferred thru Tornado Cash, the origin or destination of cryptocurrencies are impossible to trace.
 
It is no secret that such a system is used and abused for money laundering purposes. When hackers exploit DeFi protocols and drain assets, they use Tornado Cash-type cryptocurrency mixers to transfer funds to another wallet in an untraceable way. The hackers use the system to hide stolen funds.

Voices against the U.S. Treasury ban

Digital privacy advocates say that the regulators overstepped by pointless bans. Coin Center is a U.S-based crypto policy advocacy group, and its directors Jerry Brito and Peter Van Valkenburgh criticized the situation and said, “By treating autonomous code as a ‘person’ OFAC exceeds its statutory authority,”.
 
The Electronic Frontier Foundation (EFF) also made a comment about the concerns about U.S. Federal Department banning a code on the same day as Coin Center. EFF has claimed that the codes are subject to freedom of speech and should be protected under the First Amendment.
 
Another claim is that many major banks somehow have been involved in money laundering and get fined. There are many examples of it. HSBC is one of the world’s oldest and biggest banks and has a really bad reputation in money laundering history but still operates. Tornado Cash is just a service open to the public, and some bad guys can misuse it. The protocol has nothing to do with it.
 
We will see more debates and challenges in the courtrooms between the U.S. Department and crypto advocates. Coin Center stated that they might go to court against the department’s pointless actions. The argument will be shaped around not in specific Tornado case but more about classifying smart contract protocols in the eyes of the law.

Can Tornado Cash actually be banned?

The real problem is that Tornado Cash is just a piece of code, an algorithm. It is a smart contract written on the Ethereum blockchain and works indefinitely. There is no big red button to stop the system. No ban or no prevention can stop the system.

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