Tornado Cash Shutdown By U.S. Treasury Dept.

The moment that many have feared is finally here.

On August 8th, the U.S. Treasury Department added Tornado Cash to their OFAC list of Specially Designated Nationals and Blocked Persons. In other words, it is now illegal for any U.S. citizen, resident, or company to interact with a protocol currently holding $437 million in crypto assets.

The consequences of this for crypto are downright scary.

The Sanctions

In many ways, it makes sense why Tornado Cash (Note: we would link to the website, but it honestly might be illegal to visit it) has caught the ire of the Treasury Department.

For those unaware, Tornado Cash is a protocol built on Ethereum that enables users to privately transfer funds on-chain. This has made it the go-to option for law-abiding citizens looking to transact privately… and criminals looking to launder money.

Naturally, the Feds ignore the many harmless reasons why one would use Tornado Cash and instead focus on its criminal potential.

The main criticism of Tornado Cash from the Feds is that it is used by cybercriminals to launder stolen money. There is definitely some truth to this, with the most infamous example being the North Korean hacking group Lazarus Group using Tornado Cash to move money stolen in the Ronin hack.

This criminal potential was reason enough for the Feds to shut down Tornado.

Rippling Effects

This development is important because it doesn’t only impact Tornado, it also has a rippling effect throughout the crypto ecosystem.

For example, Circle’s USDC stablecoin is one of the two dominant stablecoins currently on the market, along with Tether’s USDT. Some of the most essential DeFi protocols rely heavily on USDC. This means any failure with USDC would come with disastrous consequences for DeFi.

Many have been harping about the risks of hitching DeFi’s wagon to a centralized third party like Circle. The argument is that this gives the Feds an angle to destroy crypto; as we said: a collapse for USDC is disastrous for DeFi.

Although everyone agrees that a USDC collapse would be disastrous, not everyone agrees that it’s something we need to be worried about. Instead, these people believe that the odds of the Feds cracking down on USDC are low, so we might as well use USDC to its fullest until we find a superior decentralized alternative.

Well, it turns out that the Feds pressuring Circle is not some distant dystopian future after all. As of this week, it’s our reality.

Following the announcement on Monday, Circle froze 75,000 USDC worth of funds linked to the Tornado Cash addresses sanctioned by the Feds.

Yes, it’s a small amount. But that’s not the point. What’s important is that it shows that Circle can and will freeze funds to comply with the Feds. It was only 75,000 this time. What will it be next time?

Looking Ahead

Although it’s unfortunate for the innocent people who now can’t get their money out without breaking the law, Tornado Cash is a small fish. What makes it so concerning is its potential to be the first domino.

Who’s to say that the Feds won’t move to pressure each DeFi protocol to implement KYC/AML requirements? Or force Circle to blacklist any address that is not KYC’d?

Suddenly DeFi would look a lot like the traditional finance system it was meant to replace.

The path out of this dilemma remains unclear. Maybe the solution is to make a collective effort to focus on lobbying and politics so that we may educate current politicians on crypto and elect more pro-crypto candidates. Maybe the Lunarpunks are correct and we need to double down on building protocols resilient to government intrusion. Perhaps the answer is a mix of both or something else entirely.

In any case, the clock is ticking much faster than we expected. The time to fight for the future of crypto is now.