Tornado warning

DeFi advocates also battle regulators on a separate front, where the main issue to be addressed is privacy. Nowhere are the stakes for the future of decentralized financial systems higher than in the case of Tornado Cash.

Like Uniswap, Tornado Cash is a collection of smart contracts on the Ethereum blockchain. It allows users to deposit cryptocurrency into a pool of other people’s digital money and then withdraw it to a different address, while using advanced cryptographic techniques called zero-knowledge proofs to ensure that it does not there is no public link between the deposit address and the withdrawal address. This means that money is no longer tied on the blockchain to the user’s past transactions, making it harder to trace and providing a layer of privacy.

In August, the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned 45 Ethereum addresses associated with the platform, banning Americans from using it and decimating its user base. The agency said it took action because Tornado Cash had been used to “launder” billions of dollars, including hundreds of millions stolen by North Korean state-sponsored hackers.

OFAC has previously sanctioned blockchain addresses associated with foreign individuals, but has never sanctioned a smart contract. Nor does it have the power to do so, argues Peter Van Valkenburgh, director of research at the Coin Center, a policy advocacy group in Washington, DC. As Coin Center points out, many OFAC-sanctioned contracts cannot be modified, blocked, or disabled by any of the Tornado Cash developers; they exist independently of human intervention.

Although OFAC has the legal power to sanction individuals and certain foreign entities, it cannot prohibit Americans from using a tool like Tornado Cash, says Van Valkenburgh: “The statute that empowers OFAC n was ever intended by Congress to be used to tell Americans what software tools they can and cannot use.

Coin Center filed a lawsuit against the Treasury Department seeking to overturn the sanctions and prevent the Treasury from “enforcing against ordinary people their obvious and fundamental rights to privacy.” In addition to arguing that OFAC lacks the authority to ban software tools, Coin Center also argues that the sanctions violate the Constitution. Popular US crypto exchange Coinbase is funding a similar lawsuit against the Treasury.

After the sanctions were lifted, GitHub removed the project’s source code and the project’s website, tornado.cash, was taken down. Regardless of OFAC’s actions, Dutch authorities arrested one of Tornado Cash’s developers, Alexey Pertsev, and a prosecutor accused Pertsev of facilitating money laundering.

Pertsev was one of the founders of Tornado Cash. But like most crypto projects, Tornado Cash is open source and relies on a collective of loosely affiliated contributors. Another co-founder, Roman Semenov, did not respond to a request for comment.