Tornado Cash, a decentralized privacy protocol built on the Ethereum blockchain, gained global attention in August 2022 when it was sanctioned by the U.S. Treasury for allegedly facilitating the laundering of funds from cybercriminal activities, including $455 million stolen by the North Korean state-sponsored group Lazarus [1]. The protocol operates as a coin mixer that uses zero-knowledge proofs and smart contracts to break the link between a user’s deposit and withdrawal addresses, enhancing on-chain privacy [2].
Users deposit cryptocurrency into Tornado Cash’s liquidity pools and then withdraw the funds to a new address, making it difficult to trace the original sender. To confirm ownership during withdrawal, users must provide a secret hash generated at the time of deposit, a process known as commitment [3]. The protocol is designed to be non-custodial and community-driven, with no single entity controlling the funds after its Trusted Setup Ceremony in May 2020 [4].
The native token, TORN, plays a key role in governance and incentivizes participation through liquidity mining and Anonymity Points, which can be converted into TORN tokens via the protocol’s Automated Market Maker [5]. Users accumulate Anonymity Points by using the service and must prove ownership through zero-knowledge proofs to claim rewards [6].
Tornado Cash has both legitimate and controversial uses. While it provides a layer of privacy for individuals seeking to protect their financial data—such as employees paid in crypto or NFT artists wanting to avoid attention—its capabilities have also been exploited by hackers to launder stolen funds. The U.S. Treasury claims Tornado Cash has laundered over $7 billion in cryptocurrency since 2019, while Elliptic, a cryptocurrency analysis firm, estimates the amount at $1.5 billion, with the larger figure representing total volume including legal transactions [7].
The sanctions led to immediate consequences for Tornado Cash. The U.S. Office of Foreign Assets Control (OFAC) banned American entities from engaging with the protocol, and companies such as Circle and GitHub complied by blocking related addresses and accounts [8]. Tornado developers, including Roman Semenov, expressed concerns over the implications for open-source software and digital privacy, noting that the ban targeted code rather than an organization [9].
The debate around Tornado Cash reflects a broader tension between privacy and regulation in the crypto space. Proponents argue that the protocol is a tool like a VPN or email, which can be used for both legitimate and malicious purposes. Critics, including the U.S. Treasury, warn that unregulated privacy tools enable criminal activity and must be controlled to prevent financial crime. The ban has sparked discussions about the future of decentralized systems and the limits of regulatory authority in an increasingly digital world [10].
Source:
[1] What Is Tornado Cash And How Does It Work? (https://www.coingecko.com/learn/what-is-tornado-cash-and-how-does-it-work)
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