Is Tornado Cash The Same As Money Laundering?

By Kevin • January 23, 2022 2:36 pm • Comments

The case of the recent Crypto.com hack is now resolved and the 400 plus users that were affected by the hack are now fully reimbursed by the company.

The one topic that came out of that hack was the discussion of Tornado Cash which is essentially a mixing protocol that obscures details of transactions on a blockchain in order to throw off investigators who are trying to follow the trail of the money.

These mixing protocols are not new technologies though as they have pretty been around since the inception of blockchain technology itself.

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Looking at the history of mixers, record shows that the majority of them have always resulted in them being shutdown and the operators being arrested.

For example, there was a previous bitcoin mixing operation called Helix.

Coindesk reports:

In the case of the darknet bitcoin mixing service Helix, former U.S. Assistant Attorney General Brian Benczkowski wrote in a press statement announcing the service’s shutdown and arrest of operator Larry Dean Harmon: “This indictment underscores that seeking to obscure virtual currency transactions in this way is a crime.”

At the time, many thought this was a troubling precedent for mixers and the technology behind them, although it should be noted that Harmon pleaded guilty and so the prosecution never had to prove its case that Harmon was laundering money.

“Is Tornado Cash laundering money?

They are certainly obfuscating it.

But I’d be careful with the term money laundering,” Bill Callahan, a retired Drug Enforcement Agency agent and now director of government affairs at the Blockchain Intelligence Group, told CoinDesk.

It turns out that there is a strict criteria that has to be satisfied in order for something to be considered money laundering which includes placement, layering, and integration.

Much of the mixing protocol that has happened did not satisfy these three requirements which makes it very difficult to understand if a mixing services is operated legally.

It was also observed that there was a key distinction between Tornado Cash and other previous mixing services.

Tornado Cash uses autonomous and decentralized permission less code that is similar to the way that Decentralized Finance (DeFi) applications are run.

As a result, it might be difficult to identify anyone who is liable for Tornado Cash because no one is actually hosting the service.

Instead, it is like open-source code that anyone can use.

Tornado Cash does offer some useful tools that might help with identifying compliances.

However, authorities are questioning the usefulness of the tool.

CoinDesk explains:

For its part, Tornado Cash says it offers compliance tools like a cryptographic note that can prove the provenance of funds.

But Stephen Sargent, deputy anti-money laundering (AML) manager at crypto exchange Bitfinex, questions its utility.

“The compliance tool that Tornado Cash has doesn’t help law enforcement unless law enforcement is interacting with the person that stole the funds,” he told CoinDesk in an interview.

“They make it so that law enforcement can approach a person that has interacted with Tornado Cash, and they can give law enforcement a deep dive into all of their transactions.”

So if law enforcement has users of Tornado Cash in their custody, the tool is useful in the evidentiary process. But if they don’t, it’s not much help.

As a result, all exchanges are advised to be naturally suspicious of any funds coming from Tornado Cash as there is a chance that a small percent of those be be illicit activity.

That being said, this is true for any service provider including those that deal with fiat currencies.

Regulation here will help encourage further mainstream adoption of cryptocurrencies.

 

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