When the US Treasury sanctioned Tornado Cash via OFAC, it was the first significant shot across the bow. However, Ameen Soleimani, an early contributor to Tornado Cash, thinks the era of crypto mixers is not yet over. He plans to launch a forked version of Tornado Cash and make it complaint (by user choice) with the sanctions that took out Tornado Cash.
Why Was Tornado Cash Sanctioned?
On August 8, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) crossed a milestone when it sanctioned a decentralized cryptocurrency mixer Tornado Cash, running on the Ethereum network. Not only is TC an open-source protocol, but it is agnostic on who uses it and for what purpose.
Users simply deposit crypto funds into a large liquidity pool, and then withdraw the same amount. As such, Tornado Cash offers financial privacy by obfuscating the source of the originally deposited tokens. Even Ethereum co-founder, Vitalik Buterin, admitted to using Tornado Cash so that his donations to Ukraine were not made public.
However, the US Treasury’s OFAC equated the agnostic nature of Tornado Cash to $7 billion worth of money laundering since the protocol launched in 2019. This concern became acute following the historic attack on Axie Infinity last April. North Korean attackers drained $620 million from Axie’s Ronin sidechain.
Soon after TC’s official sanction, Alchemy and Infura blocked access to Tornado Cash dApp, effectively disabling it despite its smart contract still running on Ethereum.
Given that a self-custodial wallet like Metamask uses such infrastructure, Tornado Cash’s case questioned decentralized finance (DeFi) as a concept itself. Likewise, the controversial case placed doubt on centralized stablecoins. Circle, the issuer of USDC, froze all USDC funds according to OFAC-designated Tornado Cash addresses.
In the aftermath, the non-profit advocacy group Coin Center filed a federal lawsuit against OFAC last October. In the meantime, one of the key Tornado Cash developers, Alexey Perstev has been jailed by Dutch authorities, still awaiting trial.
But coding is nothing but flexible. A new solution that may satisfy OFAC while providing financial privacy is likely on the horizon.
Both Financial Privacy and OFAC-Compliance?
One of Tornado Cash’s early contributors, Ameen Soleimani, developed a forked evolution of Tornado Cash, dubbed Privacy Pools. Still, in demo form, it should go live over the weekend.
Privacy Pools aims to satisfy OFAC’s anti-money-laundering mission using zero-knowledge proofs. In the crypto space, this type of cryptographic technique has been used as a powerful tool to verify identity without revealing more than it’s necessary to prove that identity.
In other words, zero-knowledge proof allows one party (the prover) to demonstrate to another party (the verifier) that they hold specific information without revealing any other information outside of holding that information.
In the case of Privacy Pools, zero knowledge plays out as follows:
- When withdrawing funds from the liquidity pool, Privacy Pools can generate a zero-knowledge proof publicly displaying the withdrawal address, ensuring it is not blacklisted as criminal.
- At the same time, the identity of the user remains private.
If the Privacy Pools launch is successful and gains traction, OFAC is headed for a big public test. The department’s actions will showcase if it sanctioned Tornado Cash as a general attack on financial privacy or if it was a genuine attempt at curtailing money laundering.
This article originally appeared on The Tokenist
Sponsored: Find a Qualified Financial Advisor
Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.