Yesterday, the last two co-founders of the decentralized service Tornado Cash, a cryptocurrency mixer that increases the privacy of transactions in Ethereum similar to coinjoin for Bitcoin, were arrested.
After Alexey Pertsev, the first co-founder to be arrested last year in the Netherlands, Roman Storm and Roman Semenov will now also face heavy charges of money laundering and sanctions violations by US authorities.
Given the ending of the Tornado Cash story, some think coinjoin on Bitcoin will also be blocked because it has the potential to hide the tracks of hackers and cybercriminals.
Full details below.
Summary
Arrested the last two co-founders of decentralized mixer Tornado Cash for money laundering and violating sanctions
News broke yesterday of the arrest of the last two co-founders of the decentralized platform Tornado Cash, Roman Storm and Roman Semenov.
According to the indictment, filed in the US District Court for the Southern District of New York, the two allegedly facilitated more than $1 billion in cryptocurrency money laundering.
A year ago the third co-founder Alexey Pertsev had already been arrested in the Netherlands, where he is now awaiting trial on charges against him similar to those filed against his partners.
Tornado Cash’s mixing service operates on compatible EVM blockchains such as Ethereum, Arbitrum, Optimism, Polygon Avalanche, and Binance Smart Chain and allows those who use it to lose track of their ETH transactions, effectively making it an ideal tool for those seeking maximum privacy.
Put simply, the way it works is very similar to that of coinjoin transactions on Bitcoin, where you can mix your own BTC with those of other users
Note: Some blockchain infrastructure providers such as Infura and Alchemy have censored access to Tornado Cash so it can currently only be accessed via custom RPCs.
The Tornado Cash mixer had already been sanctioned last year by the US Treasury Department’s Office of Foreign Assets Control given allegations about possible involvement of the North Korean hacker group Lazarus who allegedly laundered hundreds of millions of dollars through it.
While the defendants defend themselves by stating that the mixer trivially represents open source software and what they intended to develop was merely a tool dedicated to privacy, the prosecution does not feel the same way,
US Attorney Damien Williams said Tornado Cash and its operators “knowingly facilitated” money laundering and knew they were helping hackers and cybercriminals hide the proceeds of illicit transactions.
In detail, the trio knew that hackers in attacks related to Axie Infinity’s Ronin Bridge and Kucoin and Bitmart exchanges were exploiting Tornado Cash to clean up after themselves.
According to the indictment, Storm and Semenov acknowledged that they had not incorporated access solutions via KYC or AML as required by US law by making misleading statements regarding their extraneousness with control of the protocol and its operation.
Weighing even more heavily on the fate of the three founders is a matter alleging that they received 2.6 million stablecoins each from the protocol to make up for the initial sanctions imposed on them.
The Justice Department has already arrested Storm while OFAC has blocked eight Ethereum addresses allegedly belonging to Semenov.
Will authorities go so far as to also block coinjoin transactions on Bitcoin?
The story of the arrest of the founders of Tornado Cash is opening a very sensitive debate on the issue of privacy in cryptocurrency transactions applied to open source software, suggesting that perhaps the next to be attacked by US prosecutors will be coinjoin-related services on Bitcoin.
After the arrests of Semenov, Storm, and Pertsey, a new “legal case” has opened up that is potentially damaging to the future of software developers, who until now have never feared being indicted for issues related to open-source code.
Obviously in the Tornado Cash case, the defendants knew that they were facilitating money laundering and did nothing to prevent it from happening.
However, the legal complexities surrounding this story could wreak havoc for other decentralized platforms as well.
In the case of coinjoin, Bitcoin transactions can be mixed in a manner quite similar to Tornado Cash by combining multiple BTC payments from different spenders into a single transaction and making it virtually impossible to determine which entity paid one or the other recipient.
The importance of privacy to Web3 players has reached such a high level that they can tolerate the occasional use of technology for illicit purposes.
Then again, even with traditional cash there is abundant use of money laundering, yet they do not proceed to block the printing at the source but prefer (rightly) to go and investigate individuals or groups practicing illegality.
In any case, between late 2022 and early 2023 the number of coinjoin transactions reached a number so large that it can be compared to the volume moved on Tornado Cash.
The fears of US authorities about possible implications between the protocol and criminal groups dedicated to money laundering is growing significantly, as is the fear of decentralized software supporters of seeing their freedom blocked right from the source.
