CrypTalk ep 6 – Tornado Cash sanctions, mixing services and how to keep and move your crypto safely

In this episode of CrypTalk, Ross Sinclair speaks to Gaurav Nair of Jaltech about the sanctions against Tornado Cash, a cryptocurrency mixing service which was designed for privacy, but was abused for money laundering by the North Koreans, which caused the Office of Foreign Exchange Control (OFAC) to crack down on the service. Also discussed is how to store your crypto safely and what risks you potentially face with each different service. 

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Gaurav Nair on what a mixing service is

There are numerous of these (mixing services) that exist in the blockchain ecosystem. And what it does is basically offer a privacy service. If someone knows your blockchain address, then because the blockchain is just a list of all the transactions and it’s public, they can then see every transaction you’ve ever done and every transaction you’re going to do as well in the future. And so these services have popped up. And what they do is they allow you to transfer your money in. A lot of people do so simultaneously, and then it transfers out into a new wallet. So in that case, no one will know that that wallet belongs to you. It gives you the ability to be private and to have your transactions kept to yourself.

On the uses for mixing services

You can imagine if you gave someone your bank account because they owed you some money to pay into it, they’d know everything you’d ever done. They could look at which gym you go to because you can see your gym membership, they can see what you like to buy, etc.. And so privacy is actually quite an important thing. No one wants the whole world to know everything they do. To give you some concrete examples, the founder of Ethereum, Vitalik Buterin, said in the wake of all of this he used mixing services when he donated money to Ukraine. So there are various reasons why people want things to be private. There’s always the trope that if you want something to be private, you have things to hide. But that isn’t necessarily the case. There are lots of legitimate reasons that people want privacy.

On what caused OFAC to sanction Tornado Cash

So Tornado Cash is a smart contract. It’s a piece of code that runs on the Ethereum blockchain and no humans that run it. It just runs automatically on an ongoing basis. And when you put money in, you can then specify which wallet it pays out to, and that’s how to achieve the privacy. Now, North Korea, they have a group that has been hacking cryptocurrency exchanges and various programmes. And once they get these crypto tokens, they use these mixing services in order to hide the fact of how they liquidated it, and they then use it to finance their regime, it  might be financing their nuclear programme or whatever else. And so the US government, seeing that North Korea has been using Tornado Cash, put it on a sanctions list, the OFAC list and what this means is that US persons, that means natural people or companies, cannot interact with Tornado Cash anymore. Now, this is a precedent. There have been other mixing services that have been sanctioned in the past. But these mixing services work differently. They almost work in a manual way where, let’s say a lot of people give me their currency and then I swap it around. However, Tornado Cash is just code. And this is the first time that code has been sanctioned. Previously, only people or property had been sanctioned. And so there’s also a whole lot of questions that have arisen about whether or not the OFAC is allowed to even do this. I’m sure there’ll be lots of challenges in court that will play out over the coming years, probably. Also, in America, they have quite strong protection of free speech, and in previous court cases, programming, software, code has been seen as speech. So there are all kinds of questions from a free speech point of view, whether it can be sanctioned in addition to all of this. One of the developers of Tornado Cash ended up being arrested and is being held in the Netherlands and this has also caused deep consternation in the industry.

On whether privacy or prevention of crime should be prioritised 

That’s a question I guess we have to wrestle with as a society. Where do we want to draw the line? The thing is that as technology improves, the ability to provide surveillance improves as well. And the question becomes more and more important. Another question is, well, then, should we just ban anything that leads to privacy? And one approach which has been suggested for regulators is that they regulate the places where cryptocurrency turns into money. So when you are taking a rand and buying cryptocurrency on an exchange, at that point the exchange asks you where you got your money from. And so on. Then, while you’re on the blockchain, potentially allow the use of privacy, technology and so on.  Finally, when you want to come back into rand, it’s time for the exchange to ask: “Where did all this money come from?” And so if you’ve been selling drugs and that’s how you earn the money, that’s the point where there can be an investigation, where we say: “Well, let’s follow this trail back now. Where did it go? It touched a mixing service.”  If you can’t prove how you’re turning back into money, if you can’t prove that it didn’t come from a criminal source, then at that point let the regulator catch you, as opposed to just banning the use of all these tools for the general public. 

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