Tornado Cash And The Problem of Bitcoin Mixers

On August 8, 2022, the Office of Foreign Assets Control of the United States Department of the Treasury Tornado Cash blacklisted. The logic, according to the department, was simple; Tornado Cash ran an illegal crypto service that made it easy for criminals to launder money. The service’s blacklist made it illegal for any United States resident or citizen to send or receive money through the service.

On the same day, the domain used to host the project was removed and GitHub suspended developer accounts. Web3 companies were also not excluded from the tour, as Circle, the second largest stablecoin issuer froze approximately $ 75,000 in USDC from Ethereum addresses belonging to Tornado Cash.

However, the Feds weren’t just looking for Tornado Cash as an entity. They were also chasing the protocol builders. Two days after being blacklisted, Alexey Pertsev, one of the founders of the protocol, was arrested and detained in Amsterdam. He still has to be out.

With that, the Treasury Department had effectively eliminated Tornado Cash almost entirely. However, the question remains; because? What made Tornado Cash so dangerous that the federal government fielded everything it had to take it down?

The enigma of mixing

When people talk about the benefits of Bitcoin as a currency and indeed Crypto as a financial system, they never fail to mention anonymity. Bitcoin, they often say, is great because it offers anonymity, which is something the traditional banking system doesn’t offer by design. However, this is not entirely true. For example, if you keep your coins in a centralized exchange, you have very little anonymity.

Even if you keep your coin in your address, on-chain analytics could help spy on third parties or link the address to your real-world identity or track what you are doing with your funds.

For people who require complete financial privacy, this simply wouldn’t be good. Since the world of cryptocurrencies is probably the closest approximation to a free market that anyone can find, it wasn’t long before this problem was solved.

The solution to the pseudonym problem of cryptocurrencies was something called Mixing of bitcoins. Bitcoin mixing is a service that mixes tainted or potentially tainted crypto tokens with others, to make it difficult to track the coin’s location. This is usually done by pooling funds from different sources and then randomly scattering them at different intervals. It makes it very difficult for even the most motivated third party to trace the funds and thus contaminate them. Since both legal and illegal actors can use Bitcoin’s mixing services, it is nearly impossible to taint any cryptography that comes from the mixing address.

This gives law enforcement a huge headache. Before the popularity of these mixing services, law enforcement could track down laundered or stolen crypto funds with a great degree of accuracy. In fact, they could make sure that no other reputable organization transacts with tainted addresses or cryptocurrencies.

Bitcoin mixers throw a wrench into that wheel and make the idea completely unsustainable. It is easy, as a crypto maximalist, to argue that the government is wrong to be against these mixers. However, the facts paint a more nuanced picture.

In 2013, following the Sheep Marketplace robbery, Bitcoin Fog, a mixer, was used for launder some of the 96,000 stolen bitcoins. Two years later, the Bitcoin fog was also used to it launder a total of 7,170 stolen Bitcoins from the Chinese exchange Bter.com. From 2014 to 2017, an Ohio man named Larry Dean Harmon laundered about $ 300 million in stolen coins through its Bitcoin Helix mixing service.

In other words, it is clear that these mixers are being used for illegal transactions and the government is right to care.

Tornado The Tornado of Cash

The US government has been on the trail of Bitcoin mixers for a long time. Bitcoin Blender, one of the largest bitcoin mixers, Closed after being persecuted by the police. Last year, Roman Sterlingov, the founder of Bitcoin Fog, was arrested by the US military on charges of money laundering. Earlier this year, US forces also hunted down the Russians Hydra darknet site and they were able to shut down its servers and sanction the site itself.

Blender.io, one of the largest Bitcoin mixing services in the world, also got its share of sanctions after the US Treasury Department’s Office of Foreign Assets Control issued sanctions against it in May. According to the Treasury Department, the service had connections to North Korea and housed at least $ 21 million of the $ 622 million Axie Infinity hack.

These arrests made it clear that the government was stepping up its surveillance of the crypto space and was determined to make it difficult for criminals to launder stolen funds.

However, Tornado Cash’s current problems aren’t just because it’s a Bitcoin mixer. In other words, it wasn’t targeted because it was just a common Bitcoin mixing service. There was something else.

In May 2022, there was a daring hack on the Ronin Bridge, a blockchain project associated with the popular play-to-earn game Axie Infinity. The hack it was linked to the notorious North Korean cybercrime group Lazarus. Lazarus is famous throughout cyberspace for planning and executing some of the most incredible hacks the computing world has ever seen. The group used Tornado Cash to launder a large chunk of the $ 622 million stolen earlier this year.

But that robbery is just the biggest in a long line of incredible money laundering activities. According to law enforcement, Tornado Cash, since 2019, has been a willing tool used recycle over 7 billion in criminally acquired funds. After the DeFi explosion in 2020, the service accelerated the pace in terms of managing illicit funds and obfuscating their sources. According to TRM’s analysis, over 40% of all funds related to the service in the months of June and July 2022 they were illegal funds. Aside from that, the Lazarus Group has used Tornado Cash to launder funds in all ten of its latest robberies.

Not even Lazarus is Tornado Cash’s only customer. The service was also used to launder stolen funds April 2022 Beanstalk hacking where a hacker stole over $ 180 million worth of cryptocurrencies. All that money went through Tornado Cash. Even the smallest criminals have taken advantage of Tornado Cash’s open source generosity. In 2021 the Bent Finance hacker and Visor’s financial hackers moved around 350 ETH via Tornado Cash. In July, a hacker stole about 1,300 ETH from OMNI, an NFT money market platform, and immediately ran it through Tornado Cash to clean up the money. Around the same time, cybercriminals sent $ 36 million in stolen funds from Horizon of the Protocol of Harmony bridge to service.

All of these show that Tornado Cash, at least in the eyes of law enforcement, wasn’t just an innocent open source protocol that anyone could use. It was a favorite tool of hackers and criminals and they used it whenever they could and how they could. Like almost all Bitcoin mixing services, Tornado Cash has hardly any guardrails to stop cybercriminals from using it. Despite public statements proposing the KYC protocols, the service continued to function in the most laissez-faire fashion. In retrospect, this meant that the service would always be sanctioned. It was completely inevitable.

What does this mean for the future of bitcoin mixing

It’s hard to imagine a future where law enforcement efforts are enough to stop Bitcoin mixing. While they can always take big players out of the game, the fact that these services have no regulatory obligations and can be used for legal and illegal purposes means they will be leaving soon.

Right now, it seems that the big players in cryptocurrencies are content to disown these mixers. Tether, for example, has not sanctioned any Ethereum address involved with Tornado Cash. However, the rationale for this is that the government has yet to ask him to do so and that he would do so immediately after making the request. For cryptocurrency maximalists, this could be bad news as it means cryptocurrencies could be subject to state capture. However, it could be argued that the threat these hackers and services that help them pose to the cryptovert is greater than the threat of state capture. If the Treasury Department is right, hackers have made at least $ 7 billion in the past four years with the help of Tornado Cash.

These are funds that could have helped countless innovations and could have helped build a more vibrant and secure crypto ecosystem. These are funds that may never be recovered.

While Bitcoin mixing, and indeed Bitcoin mixers, are unlikely to go out of style on their own, there is hope that they may eventually become obsolete. According to Chain analysis, even stricter fund tracking algorithms could emerge in the coming years that could make the Bitcoin mix obsolete. If that happens, it would mean that cryptocurrencies have taken the junk away and solved the mix puzzle once and for all.

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