We’ve all seen the iconic scene at the beginning of “The Wizard of Oz” with the scary roar of the tornado raging over the plains. Dorothy Gale struggles to get home while clutching her puppy for her life. At first view, this tornado appears to be a force of evil rather than a neutral act of nature, or perhaps the start of a tremendous series of positive developments.
But what if the tornado never ripped across Dorothy’s Kansas? The Wicked Witch of the East would be unharmed and would continue to hurt innocent people in collaboration with her sister in the West.
The latest measures to prohibit Tornado Cash may incur the same repercussions as eliminating the twister from the film. They appear to be an honest endeavour to root out evil on the surface, but upon closer scrutiny, they stand to cause more harm than good.
The Tornado Cash website displayed on smartmobiles. Image: 2022 BLOOMBERG FINANCE LP
Gets works as a product manager at Espresso Systems, the company behind the Configurable Asset Privacy technology and the Espresso layer 1 blockchain. Gets has spent the last five years developing behind-the-scenes products and networks for privacy-focused projects in crypto and Web3.
Tornado Cash, a privacy tool running on the Ethereum blockchain for three years, was sanctioned last week by the US Treasury Department’s Office of Foreign Assets Control (OFAC). The Tornado is a smart-contract application that has alarmed the US authorities due to its suspected usage by the North Korean regime in the laundering of hacked or stolen funds. Concerningly, the OFAC has sanctioned the code that runs the Tornado Cash application rather than persons or businesses who use the service for criminal purposes. The project has been labelled as a dark force.
However, this might be a chance for the crypto sector to focus on lobbying for appropriate approaches to privacy, and to double down on privacy breakthroughs that can safeguard consumers without exposing them to government penalties. Amid the volatility and repercussions from the sanctions, we see some possible net-positive outcomes for the crypto space and consumers of bitcoin goods.
Unstoppable code
Tornado Cash is still operational despite the industry’s many challenges. Even on the day after the sanctions were imposed, it handled more than $2 million in bitcoin transactions. The code cannot be terminated. While it remains to be seen if the smart contract will remain in use and continue to facilitate privacy for those who want to break the sanction, it is technically impossible to shut down.
Trolls moving cash from Tornado Cash to random wallets has been one of the more visible issues. Many 0.1 eth withdrawals from Tornado Cash have been transferred to well-known Ethereum accounts after the penalties were implemented. If receiving products through Tornado Cash is now forbidden, the owners of these accounts are now in breach of the new punishment, at least on paper. Even if they are unlikely to be arrested, they must live with the Sword of Damocles hanging over their heads. This danger has even temporarily prevented innocent users from accessing decentralised applications such as dYdX.
The sanctions have added complexity to the product and prompted anxieties and doubts for consumers using it for perfectly legal and even routine purposes. It is unclear what will happen to a US resident who has a significant quantity of money in Tornado Cash under the sanctions. His funds are currently frozen and must be reported to OFAC. There is no clear procedure in place to collect those payments.
Right now, it appears like collecting his cash would be a sanctions breach. There is, at the very least, no clarity. Many people believe that the punishments were either callous, disregarding the privacy requirements and financial integrity of innocent users, or foolish.
As a result, it is evident why penalties have generally targeted entities implicated in money laundering rather than the tools and technology themselves. When the tools are used, there are unavoidable implications for innocent users. In addition, penalising the technology is probably ineffective from an enforcement standpoint, as seen by Tornado Cash’s continued processing of enormous amounts of payments.
Tornado Cash exists as a smart contract on the Ethereum blockchain. In turn, Ethereum operates as a decentralised database maintained by thousands of nodes distributed throughout the globe in a variety of locations and governments. Through a mix of cryptography and incentives, all of these nodes collaborate to develop and maintain the global Ethereum database. That worldwide database includes the Tornado Cash smart contract. All of this makes smart contracts, particularly ones like the initial Tornado Cash contract (which cannot upgrade the code), almost unstoppable.