Interpretation of the most severe encryption sanctions in history: what happened to Tornado Cash

Original title: "Sudden | Interpretation of U.S. Department of the Treasury's Sanction on Tornado Cash 20220808"

Original author: Alpha Rabbit, Alpha Rabbit Research Notes

Background

On August 8, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (The Office Of Foreign Assets Control of the US Department of the Treasury) referred to as OFAC, the official website shows that some addresses that interact with the Tornado Cash protocol or related Ethereum addresses will be put into SDN List (US Special draw up a list of nationals).

Source: U.S. Department of the Treasury

Here is an explanation of this SDN List: What is the Specially Designated Nationals List of the United States? Sanction schemes, property and property interests of individuals or related entities are frozen.  

How to sanction?  

Note that, generally speaking, US persons (including US citizens, lawful permanent residents, entities organized under the laws of the United States, and other organizations, etc.) must not conduct any transactions with SDNs, and must freeze property and property interests in SDNs they own or control. SDN is also not allowed to connect to the U.S. financial system. OFAC and the U.S. State Department also stipulate that foreign nationals who implicate U.S. persons in violating the SDN ban may be subject to civil and criminal penalties under the International Emergency Economic Powers Act (IEEPA). At the same time, foreign nationals may also be subject to secondary sanctions by the United States if they conduct significant transactions with entities on the SDN List for certain goods and services. Therefore, SDN transactions with non-U.S. persons will also be adversely affected to some extent. In addition, being included in the SDN List will also cause individuals or companies to suffer certain reputation losses.

Reference materials:

http://www.jcacherm.com/portal/article/index/id/6/cid/4.html  

What is OFAC ?

OFAC's mission is to manage and enforce all economic and trade Sanctions, including financial sanctions against all terrorism, transnational drug and narcotics transactions, and proliferation of weapons of mass destruction, the current OFAC is still the most important economic and trade sanctions against specific countries, regions and individuals in the United States of government departments. In recent years, with the deepening of the worldwide anti-corruption and anti-money laundering campaign, OFAC's policies and instructions have become operating principles that cannot be ignored by the world's financial industry, especially the United States and financial institutions that are closely related to the US financial industry.  

What are the possible causes?  

In fact, in May 2022, the U.S. Department of the Treasury sanctioned Blender, another currency mixing service, on the grounds that it was suspected of helping a certain country’s official hackers The organization (here mainly referring to Lazarus Group) laundered some of the funds stolen from Axie Infinity.

On March 23, 2022, the FBI identified the intrusion into Ronin. The illegal hacker organization is the Lazarus Group, and Tornado Cash is often used in many crimes.  

As of early May 2022 (at that time), Lazarus Group has transferred 37,000 ETH, approximately $100 million, to Tornado Cash. Some experts believe that Tornado Cash currently has a balance of 172,000 Ethereum. Around May, the black money of an official hacker in a certain country accounted for 20% of the balance held by the Tornado Cash smart contract.  

But there is no feasible way to prevent Lazarus Group from adding black money to it. Although the Tornado Cash operator has tried a lot, it cannot restrict money laundering, nor can it prevent some criminals from depositing and withdrawing money.  

According to legal expert Nicholas Weaver, on April 19, 2022, Lazarus Group got 18,256 Ethereum (approximately $50 million) in its wallet . On April 28 and 29, the ETH was transferred to Tornado Cash, and 12 days after OFAC issued the sanctions, Tornado Cash accepted the ETH from the hack. So OFAC started considering sanctions on Tornado Cash, specifically proposing that the wallet itself should be listed as a sanctioned entity, arguing that all the others involved in this pool of funds are helping to hide some black money, which may have been OFAC Beginning of planned action on Tornado Cash...

Do you think there are other reasons for OFAC's current action on Tornado Cash? How will it affect other aspects related to Tornado Cash in the future?   

Reference:

1.https:// www.lawfareblog.com/ofac-dprk-and-tornado-cash

2. https://u.today/breaking-ethereum-based-mixer- tornado-cash-sanctioned-by-us-government

3.http://www.jcacherm.com/portal/article/index/id/6/ cid/4.html

4.https://baike.baidu.com/item/ofac/6228015?fr=aladdin  

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