The Tornado Cash case is serving as an entry point to make Ethereum less resistant to censorship by authorities. Tornado Cash, a crypto mixing service, came under fire from the Treasury Department’s Office of Foreign Assets Control (OFAC) because it was used by North Korean hackers to launder funds worth hundreds of millions of dollars. OFAC sanctioned 45 addresses belonging to the service and prohibited U.S. nationals from interacting with it.
The Tornado Cash Lawsuit
Tornado Cash anonymizes the origin and destination of a transaction by pooling many addresses together. It is a smart contract that claims to be controlled by a decentralized autonomous organization (DAO). Therefore, it is difficult to identify a single person or organization responsible for the setup.
Two lawsuits, including one funded by crypto exchange Coinbase, have challenged the department’s authority to sanction open-source software and claimed that its actions violated First Amendment rights.
According to them, Tornado Cash cannot be sanctioned because it is not a person, foreign national, or property. The DAO that governs Tornado Cash is also not an unincorporated “entity”, they say, because it doesn’t have a common purpose or objective as its goal.
But the Treasury Department says Tornado Cash is an entity and an organization because concerted efforts, such as the placing of newspaper advertisements, were made to attract developers for the smart contract. Before it was put out of business, Tornado Cash also charged fees for its services. Those fees were passed onto a now-disbanded DAO.
Enforcing Validator Censorship
One of the main problems with the case has to do with enforcing censorship at the validator level. Tornado Cash resides on Ethereum. The blockchain calls itself a world computer and has nodes, that participate in assembling and attesting blocks of transactions, spread out all over the world.
Most validators complied with the Treasury’s directives immediately after they were announced. However, the number has dropped significantly since then. As of this writing, according to MEVwatch.info, 29% of validators running Maximal Extractable Value (MEV), a practice to boost validator rewards in the staking program, were complying with the sanctions. Only thirteen percent of Ethereum’s validators do not use MEV.
According to Coin Center and venture capital firm Paradigm, validators are exempt from sanctions under the International Emergency Economic Powers Act’s (IEEPA) informational materials exception.
Passed in 1988 and 1994, the IEEPA amendments protects the exchange of information or informational materials, including but not limited to publication, films, posters, phonographs, records, photographs, microfilms etc. It could be argued that information relating to transactions is exempt from the sanctions under this amendment.
The Future of OFAC Sanctions
A decision in the current case, notwithstanding, the Treasury Department could end up amending the IEEPA Act once again to include provisions that will enable it to sanction validators.
There’s also the question of Ethereum’s world computer. According to the current geographic distribution, forty four percent of Ethereum’s validators are in the United States. Germany, Singapore, and the United Kingdom account for the next biggest shares of the overall pie at 12.99%, 4.76%, and 4.06% respectively.
However, the heterogeneity of Ethereum’s makeup masks homogenous characteristics. American providers of cloud services, such as Amazon and Google account for more than 70% of all Ethereum nodes, making most of the blockchain’s network within reach of OFAC sanctions.
Finally, there’s the question of MEV relays, that transport transaction information between builders and proposers. The practice was a money gusher for validators during the staking program, but it is unlikely to survive in its current form after the program ends.