The Office of Foreign Assets Control (OFAC), a unit of the Treasury Department, has sanctioned crypto mixing service Tornado Cash. This means that it cannot be used on American soil. Tornado Cash is a decentralized app on the Ethereum blockchain that enables anonymization of transaction data.
According to the Treasury department, it has been used by hackers, notably the North Korea-linked Lazarus group, to launder more than $7 billion worth of cryptocurrency since 2019. Hackers from Lazarus are reported to have been responsible for the $625 million hack of gaming platform Axie Infinity’s Ronin Network bridge in March.
In response to the sanction, stablecoin USDC has frozen smart contracts involving Tornado Cash and will not honor them. Earlier this year, OFAC banned the use of blender.io, another crypto mixing service, in America. It arrested the founder of Bitcoin Fog, a bitcoin tumbling service, last year and the founder of Helix pleaded guilty to laundering $300 million last year. The Treasury Department is yet to weigh in on the use of Monero, a privacy-focused coin that uses the same underlying algorithmic fix as mixing services to guarantee anonymity in transactions.
Why Are Crypto Mixing Services Under the Scanner?
What is it about crypto mixing services that makes them such a favored target of government action? It may be because they are the crypto equivalent of money launderers.
In the real world, there are various money laundering methods, ranging from bank accounts in Switzerland to investments in dubious assets and artwork. The activity is much simpler in cryptoland. Crypto mixing services are also known as tumblers because they function like one by mixing cryptocurrencies from various transactions into one big pool.
After depositing their cryptocurrencies, users are given the choice of specifying a destination address and a wait time (before the funds are released to the specified address) to avoid suspicion that immediate transfers could evoke from authorities. The average monthly value sent through Tornado Cash peaked last November and it is reported to have been used during the recent protests by Canadian truckers.
The decentralized avatars of such services also do not require login credentials and use Ethereum Name Services (like Domain Name Services) that map human readable names to convoluted crypto addresses, thus enabling easier and user-friendly transactions.
Given the possibility of their misuse by criminals and crypto’s unsavory reputation, mixing services should have been on the federal government’s scanners earlier. Yet, they largely escaped sanctions until this year. Even today, their regulatory standing depends on the jurisdiction. For example, the United Kingdom is still to clamp down on the service despite calls to do so.
A co-founder of Tornado Cash told Bloomberg they are not money transmitters because they do not hold funds in custody and restrict their functions to operations using smart contracts. To that end, Tornado Cash also refused to comply with sanctions on money transfers following Russia’s invasion of Ukraine.
They also claim to be decentralized because they have handed over governance decisions to a community comprised of holders of its native token – TORN. That definition of decentralization and the utility of its token, whose price experienced a listing bump when it first began trading, is suspect.
According to statistics from Coinmarketcap, the price of TORN reached a peak of $403.38 on 20th February last year. TORN’s price mostly fell through most of crypto’s 2021 bull run, a period that included two bitcoin price records. It crashed by roughly 33% yesterday to $21.08 after news of its ban came out. As of this writing, it is changing hands at $21.78, down 29% in the last 24 hours.
Ethereum’s Gas Fee Falls as Ether’s Price Surges
Ethereum’s expected September Merge is continuing to make news. The price of ether, Ethereum’s native cryptocurrency, rose to $1818.25, its highest level in a month, yesterday morning. Analysts attributed the surge to investor enthusiasm for The Merge, which dramatically reduces Ethereum’s energy use, for the price bump.
An increase in price should translate to higher trading volumes and more on chain activity. But that doesn’t seem to be the case. In fact, on chain activity is reported to have ‘plummeted’ as Ethereum’s gas fees – the price users have to pay to conduct transactions on its network – fell to their lowest level in two years.
Analysts had said earlier that the blockchain would enter a deflationary spiral after the merge occurred in September i.e., more ether will be destroyed than created. [That is also what Ethereum’s researchers have told interviewers]. This should increase the value of ether held by investors.
“But with network activity plummeting amid the bear trend, Ethereum’s deflationary narrative is currently looking uncertain. Demand for block space must increase by roughly one-third from current levels in order for the burn rate to keep pace with post-merge Ether issuance,” writes Samuel Haig from The Defiant. It is not clear whether that will happen.