Tornado Cash and Money Laundering

Tornado Cash and Money Laundering

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While tornado cash has many legitimate uses, like protecting personal privacy or making anonymous donations, it's also been used for illicit activities such as money laundering. This has drawn the attention of law enforcement agencies around the world, including the U.S. Treasury Department's Office of Foreign Asset Control (OFAC). As a result, OFAC added tornado cash to its Specially Designated Nationals and Blocked Persons list in August 2022, effectively banning the use of the tool by American citizens.

OFAC's sanctions essentially forbid Americans from using tornado cash to privately receive a paycheck, private pay for a book, or privately do essentially anything else on the Ethereum blockchain. They're based on the assertion that Tornadocash is a money laundering tool that violates federal criminal and civil laws. This is a fundamentally misguided argument that relies on a misunderstanding of the technology, the law, and what it means to regulate speech.

Tornado Cash is a copyright mixer service that uses a technique called zero-knowledge proofs to sever the link between a user's deposit and withdrawal addresses on the Ethereum blockchain. It's a little bit like a bank's safe deposit box room: Anyone can deposit money into the pool, but only the owner of the associated security key can withdraw it. This is made possible by the fact that the pool is simultaneously used by many users.

When a new deposit is made, the copyright's preimage is pre-calculated and stored in a smart contract. Then, the user shares a cryptographic hash from that preimage in their deposit transaction with the pool's smart contract. That hash is then compared with the tokens that are withdrawn, and the link between the two addresses is severed.

In addition to these frontrunning protections, the underlying technology behind tornado cash relies on another branch of cryptography known as "zero-knowledge proofs." Zero-knowledge proofs make it impossible for an outside party to determine how a copyright is being moved between pools. This is a critical piece of the puzzle that's been overlooked by OFAC.

The problem is that OFAC's sanctions are based on the assumption that tornado cash is an unregulated, decentralized, and unmonitored service, despite the fact that it was fully centralized in the sense that its creators built and managed all of its infrastructure and web interface. Tornado Cash is a smart contract that runs on the Ethereum blockchain, and it offers a convenient, web-based user interface for interacting with that contract.

That user interface is what prompted Dutch prosecutors to charge its cofounders with facilitating money laundering and other crimes, and to add them to the country's list of sanctioned individuals. They're still fighting the charges against them, but their legal battles have now moved from the courtroom to the public arena. That's why it's important to understand exactly how tornado cash works and why it deserves First Amendment protection. If it doesn't, other tools that have been accused of facilitating crime will face the same fate.

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