In the name of justice

This week, the U.S. government dealt another significant blow to the cryptocurrency sector by adding over 44 addresses tied to Tornado Cash to the Specially Designated Nationals list of the Office of Foreign Assets Control (OFAC).

The use of Tornado Cash has now been rendered illegal in the U.S., with potential penalties including up to 30 years in prison and fines reaching as high as $10 million.

Additionally, users may face the risk of being blacklisted. As per Investopedia, being on this blacklist means that:

> Anyone listed is “blocked,” or prohibited from transacting with U.S. residents and businesses.

This effectively removes you from the financial system.

Tornado Cash, recognized as a crypto mixer favored by notorious money launderers both domestically and internationally, has been linked to hacker groups such as North Korea's Lazarus Group, which allegedly stole $625 million during the Axie Infinity Ronin Network breach in March.

A department spokesperson noted:

> “Since its inception in 2019, Tornado Cash has reportedly laundered more than $7 billion worth of virtual currency.”

What is Tornado Cash and why is it now illegal in the U.S.

Tornado Cash is a crypto protocol designed to enhance transaction privacy by severing the on-chain connection between the sender and recipient addresses. Essentially, it operates as a crypto-mixer, allowing users to completely anonymize their transactions.

In contrast to standard blockchain transactions, which are fully transparent (necessary for nodes to validate and maintain the blockchain state), transactions through Tornado are entirely private.

This means the identity of individuals withdrawing funds from the protocol remains concealed. Tornado Cash utilizes a sophisticated technology called Zk-SNARKs. While Zk-SNARKs are not inherently problematic—being employed successfully in various crypto protocols—they can also facilitate illicit activities, as is the case here.

Now, you might be wondering… What exactly is Zk-whatever?

Please keep the definition of this Zk-stuff simple, dear.

Zk-SNARKs can be quite complex, so let’s simplify the concept:

The ‘Zk’ stands for ‘Zero Knowledge Proofs.’

> In simple terms, Zk proofs allow you to demonstrate that you possess knowledge of something without disclosing how you know it or revealing the secret itself.

To illustrate, consider a scenario with a colorblind person. You have two identical balls, one red and one green. To her, they appear the same.

How can you prove to her that they are indeed different colors, without revealing the secret?

You could ask her to place one ball in each hand behind her back and choose which to keep in which hand. Once she presents both hands, you can identify the colors without revealing how you discerned them.

However, she might attribute your success to luck, so you repeat the process. If you correctly identify the red ball ten times in a row, she might start to believe that the balls are different, despite not knowing your method.

This showcases how Zk proofs can establish truth without disclosing the underlying knowledge.

To clarify, Zk proofs aim not to deceive but to prove knowledge while protecting privacy.

The term ‘zero knowledge’ thus refers to the ability to validate something without exposing the method.

It’s important to note that zero-knowledge proofs can never guarantee 100% certainty; they only reduce the likelihood of error.

Consequently, you must consider how much proof is needed, as more rigorous validation requires additional time and computational resources.

> What about the SNARK component?

Zk-SNARKs are essentially zero-knowledge proofs that also:

• Do not leak information
• Are compact and easily verifiable
• Require no back-and-forth communication (the prover can demonstrate with a single piece of evidence)
• Include knowledge proofs, allowing verifiers to confirm the prover's knowledge

In summary, Zk-SNARKs are powerful tools. Beyond their misuse in this context, they hold potential for applications like zero-knowledge KYC, enabling compliance without compromising user privacy.

KYC measures could satisfy regulators and open new avenues in DeFi, such as undercollateralized lending. Currently, most crypto loans are overcollateralized, meaning collateral exceeds potential losses, making it difficult for lenders to assess borrower creditworthiness.

DeFi requires a system to provide safer undercollateralized loans to remain competitive with traditional finance.

How Tornado Cash works

Now that we have a basic understanding of Zk-SNARKs, let’s examine Tornado Cash at a high level.

If reader interest is high, I may delve deeper into its mechanics (hashing, Merkle trees, nullifiers, etc.) in future articles.

In brief, Tornado operates on a pool system. Users deposit an equal amount of ETH into the pool, along with a hash (formed by a secret and a nullifier), and can later withdraw ETH by proving knowledge of the secret using Zk-SNARKs—without revealing it.

Thus, the Tornado smart contract verifies possession of the secret without knowing the identity of the individual or the specific ETH+hash pair, ensuring anonymity.

This feature has made it a popular tool for money launderers, as it effectively converts illicit cryptocurrency into clean funds.

The motives make sense… but is this the right approach?

All illegal activities warrant investigation and, when necessary, prosecution. Money laundering and corruption threaten societal integrity.

Yet, some may argue that the penalties are excessive.

For instance, in Spain and many European nations, committing homicide could lead to a lesser sentence (20–25 years in Spain) compared to using Tornado Cash—even without malicious intent—within U.S. borders.

It seems absurd, yet it’s a reality.

> While life sentences do exist in Europe, they are typically reserved for extreme cases.

That said, I find it challenging to determine the appropriateness of this ban.

It’s undeniable that Tornado is appealing to those seeking to launder money.

> No one can dispute that.

However, just as Tornado can facilitate money laundering, platforms like WhatsApp can enable terrorist communication through their encryption. Should we ban WhatsApp too?

I understand the U.S. Treasury Department’s rationale to combat this issue, and I have no personal stake since I am not a Tornado Cash user.

My concern is whether outright banning a system (Tornado may be illegal now, but its decentralized backend remains functional) simply because some misuse it is the best solution.

Perhaps my perspective is somewhat naïve, and a proactive approach was necessary to address the issue before it escalated. However, I am uncomfortable with censorship, particularly in a country like the U.S. that values liberty.

> I welcome your thoughts, so feel free to share in the comments!

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