Recently, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury has included Tornado Cash and 45 related Ethereum wallet addresses in its SDN sanctions list. The entire cryptocurrency industry has reached a major turning point, and government regulation of the industry has entered unknown territory.
Background of Tornado Cash
- Due to the underlying design, whether it is Bitcoin or Ethereum, transactions on their networks are public. Once someone knows your wallet address, your financial history is completely exposed.
- Anyone can view all historical transactions on the blockchain through scanning platforms, and everyone's transactions are transparent.
- For many whales or hardcore players, transferring assets on Ethereum is very inconvenient.
What does Tornado Cash do?
- Tornado Cash is an on-chain mixer, where users deposit money and receive a voucher, which can be used by any address at any time to withdraw the corresponding deposit.
- Unlike traditional transactions with clear links from "from" and "to" addresses, the source and destination of funds cannot be traced after going through the mixer. Therefore, the existence of mixers has become a breeding ground for hackers and money laundering.
- According to data from Chainalysis, nearly 10% of funds sent from illegal addresses are transferred to mixers like Tornado Cash, while funds transferred to centralized exchanges and DeFi platforms do not even exceed 0.5%.
Web2 Wearing the Cloak of Web3
- After the sanctions were issued, the source code of Tornado Cash disappeared from Github, the founder's Github account was deactivated, Gitcoin stopped sponsoring Tornado Cash, and the frontend webpage became inaccessible.
- As a smart contract running on the blockchain, Tornado Cash cannot be shut down and is not subject to legal constraints.
How to Embrace Regulation in the Future
- The regulatory authorities' crude and clumsy sanction methods face great challenges in the decentralized world. Some people maliciously sent transactions to the Ethereum addresses of many celebrities through Tornado Cash, and these people were also affected as a result.
- "Know Your Customer" has been a basic principle in traditional finance. By understanding the work and financial background of their customers, potential risks for account opening can be assessed. However, finance is also an industry that values privacy, and privacy and secrecy are like a pair of twins.
- Whether in the real world or the crypto world, there are numerous illegal activities. Decentralization does not mean no regulation, and even in a decentralized world, "Code is law" still applies.
- The future of crypto should become the regulation itself, and even a new regulatory tool that counteracts centralization.