Is Tornado Cash Complicit in Laundering Stolen Crypto? It’s Complicated, Says Former Law Enforcement Agent

In galore ways, Crypto.com’s hack is present lawsuit closed. Technical details of the hack were released (the magnitude stolen was updated to $33 million) Thursday successful a post-mortem, and the 483 users that had their funds stolen were reimbursed by the exchange.

But astatine the center of the occurrence is Tornado Cash, a mixing protocol that obscures details of the transactions connected the blockchain successful bid to propulsion disconnected investigators. Mixers, besides known arsenic tumblers, aren’t new; they’ve been astir astir arsenic agelong arsenic blockchain exertion itself. Almost universally, the destiny of mixers has been the aforesaid — shutdown and arrests.

In the lawsuit of the darknet bitcoin mixing work Helix, Assistant Attorney General Brian Benczkowski wrote successful a property statement announcing the service’s shutdown and apprehension of relation Larry Dean Harmon: “This indictment underscores that seeking to obscure virtual currency transactions successful this mode is simply a crime.”

At the time, galore thought this was a troubling precedent for mixers and the exertion down them. Though it should beryllium noted that Harmon pled guilty, truthful the prosecution ne'er had to beryllium its lawsuit that Harmon was laundering money.

“Is Tornado Cash laundering money? They are surely obfuscating it. But I’d beryllium cautious with the word wealth laundering,” Bill Callahan, a retired DEA cause and present Director of Government Affairs astatine the Blockchain Intelligence Group, told CoinDesk.

Money laundering requires 3 things: placement, layering, and integration, said Callahan. As the crypto is already successful the system, Callahan doesn’t deliberation it would needfully conscionable the accepted explanation of wealth laundering.

“Pretend I’m moving distant from constabulary with a container of cash, and jumping implicit fences, trying to evade capture… that’s not wealth laundering,” helium said. “If Tornado Cash knows who deposited the money, and who took it out, that’s not wealth laundering.”

Another cardinal quality betwixt Tornado Cash and anterior mixers is that Tornado Cash is autonomous, decentralized permissionless codification akin to DeFi protocols.

Just similar however Terraform Labs might reason that it's not liable for violating securities laws due to the fact that it doesn’t merchantability securities, it lone creates open-source, decentralized bundle that allows others to bash the issuance, Tornado Cash’s founders mightiness reason that they aren’t liable due to the fact that they conscionable built the protocol and aren’t hosting it. Self-executing code, erstwhile it has been released is conscionable that: thing autonomous and beyond the power of its creator.

Roman Semenov, Tornado Cash’s co-founder, did not reply a petition for remark sent by CoinDesk.

Terraform Labs’ case is earlier the courts, truthful that statement has yet to beryllium tested. But Callahan personally doesn’t bargain it.

“There’s going to beryllium a quality creator down it somewhere, that’s held liable. That’s different question,” helium said. “Smart contracts are not ineligible contracts.”

For its part, Tornado Cash says it offers compliance tools similar a cryptographic enactment that tin beryllium the provenance of funds.

But Stephen Sargent, Bitfinex’s Deputy Anti-Money Laundering Manager questions its utility.

“The compliance instrumentality that Tornado Cash has doesn’t assistance instrumentality enforcement unless instrumentality enforcement is interacting with the idiosyncratic that stole the funds,” helium told CoinDesk successful an interview. “They marque it truthful that instrumentality enforcement tin attack a idiosyncratic that has interacted with Tornado Cash, and they tin springiness instrumentality enforcement a heavy dive into each of their transactions.”

So if instrumentality enforcement has users of Tornado Cash successful their custody, the instrumentality is utile successful the evidentiary process. But if they don’t, it's not overmuch help.

Sargent does enactment that Tornado Cash does comply with the Office of Foreign Assets Control list of known crypto wallets tied to specially designated nationals — radical who person been sanctioned. If it didn’t bash this, OFAC would statesman targeting mixers, which successful crook would get tokens, specified arsenic Tornado Cash’s, removed from exchanges, sidesplitting its liquidity overnight.

The different reddish enactment for mixers, says Sargent, is getting progressive successful pilfering currency from ransomware attacks specified arsenic what happened past twelvemonth with Colonial Pipeline. Touching the proceeds of ransomware attacks is going to beryllium met with the aforesaid severity arsenic touching panic financing successful the years pursuing 9/11. Any benignant of arguments astir being decentralized aren’t going to clasp up to the occurrence and fury instrumentality enforcement and prosecutors volition bring down, helium said.

Even though determination could beryllium a morganatic usage for Tornado Cash successful an epoch of hyper-political divisiveness and de-platforming, Sargent sees Tornado Cash arsenic suspicious, “I don’t deliberation determination are that galore privacy-conscious radical that tin enactment done $10 cardinal successful measurement successful specified a abbreviated play of time,” helium said.

As an AML serviceman astatine Bitfinex, Sargent said that helium would decidedly question immoderate funds coming successful from Tornado Cash and request to spot much accusation astir root of funds. Trying to load a ample magnitude of superior moved done Tornado Cash onto an speech would beryllium the equivalent of walking into a slope with a duffel container afloat of cash.

According to Sargent, determination is astir ever a transportation to Binance and Huobi, 2 exchanges that are being investigated for playing fast-and-loose with KYC and are known to beryllium home to galore nested accounts (Binance has acknowledged it has a nesting problem).

But different exchanges besides person the aforesaid problem, to a lesser extent, and it would beryllium pugnacious to assertion that anyone is deliberately profiting from illicit enactment — adjacent the Tornado Cash token itself — arsenic astir 3% of each crypto measurement comes from illicit activities.

“It’s pugnacious to accidental they are making a nett from illicit activity…every work supplier has a definite magnitude of illicit activity,” helium said.