Tornado Cash
Tornado Cash

September 8, 2022

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Tornado Cash is a tool used on the blockchain. Specifically on the Ethereum blockchain and is known as a crypto mixer. Recently Tornado Cash has been in the news because it has been added to the Specially Designated National & Blocked Persons List (SDN). This means that any person in the United States, can be fined or even face jail time if they make use of a decentralized application (hereafter, dApp) called Tornado Cash. In this article I will try to explain what a crypto mixer is, what it can be used for, what the implications of this are and why the United States government does not like this. 

Crypto Mixers and the BlockChain

Tornado Cash is a dApp known as a crypto mixer. A crypto mixer can be seen as a large pool of money from a lot of different institutions and individuals. This means that users of such a dApp bundle their crypto with other users to hide their activity. It ‘mixes’ your crypto with the crypto of others. A logical followup question is why someone would use a crypto mixer. To better understand this, one must first have a decent understanding of the Ethereum blockchain.

The Ethereum blockchain can be seen as a log of all the transactions that are made using Ethereum. This means that the Ethereum that is moved from wallet to wallet is 100% traceable. So, if someone has the address to your crypto wallet, they can see every single one of your transactions. For most people this feels a lot like an invasion of privacy. As a countermeasure to this invasion of privacy, one can use a crypto mixer. This way, people can only see all transactions of the dApp users and cannot single out which user made what transaction. 

Hiding your activity

A good analogy of how Tornado Cash can hide your transactions is the following scenario. Imagine you’re a person with black clothes, glasses and a mustache and you’re playing a game of hide and seek. Now you can try to hide yourself in a good spot (trying to keep the address to your wallet secret) or you can hide in a group of other people that also wear black clothes, glasses and have a mustache (pooling your crypto with others in a mixer).

At first, you might think that hiding your address yourself is a very good option. But as it turns out if you have a large enough group of people in the mixer, your transactions become completely untraceable. A good way to look at it, is to try and determine the transactions of one person when you have a list of the transactions of a million users where all the names are redacted. This is why a crypto mixer is the perfect tool to hide your transactions from others. 

Tornado Cash on the SDN

The United States government has added Tornado Cash to the SDN. This means that no United States citizen can make use of or have dealings with Tornado Cash. The reason the US government has added the dApp to the SDN is the fact that people can hide their financial activities from the government. Chainanalysis determined that about 28% of the funds in Tornado cash are linked to criminal activities. This means that Tornado Cash is being used for various illegal activities such as money laundering. Since there are no warrants that the police can get to investigate the illegal funds that go through Tornado Cash, it was inevitable that the US would ban the use of the dApp. Tornado Cash can also be used to evade taxes. This is also a reason that the government cannot allow the use of crypto mixers. 

Implication of the US sanctions

Since the US sanctioned Tornado Cash, many US citizens that made use of the dApp will no longer do so, due to possible repercussions. A crypto mixer’s usefulness relies heavily on the fact that there are a lot of users. Since the amount of users decreases after the sanction, funds will be more traceable and it will become harder to use Tornado Cash to launder illegally obtained funds or to evade paying taxes. Though in the end people will continue to make use of Tornado Cash as it can run without any maintenance indefinitely. The US sanctions will have some impact but likely only to a certain degree. 

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