27 February 2023

Tornado Cash and Blockchain Privacy: A Primer for Economists and Policymakers

  • Articles
  • Legal
  • Blockchain / Digital Assets

As a reminder: On August 8, 2022, Tornado.cash – i.e., the website and associated Ethereum smart contract addresses - has been added by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) to its Specially Designated Nationals (SDN) blacklist.

According to the press release from the U.S. Treasury, Tornado Cash had been used to launder more than $7 billion worth of virtual currency since its founding in 2019, including more than $455 million stolen by the Lazarus Group, a cyberterrorism group sponsored by the North Korean government. In addition to sanctioning the Tornado Cash protocol and related tools, OFAC also sanctioned a list of large wallets associated with the protocol. OFAC made then history by sanctioning for the first time, a specific fully decentralized software (smart contract) connected to an address (smart contract address) on an open distributed ledger infrastructure (here Ethereum).

To get to know more on the Tornado Cash sanctions imposed and their consequences, read our article Tornado Cash - Sanctions – What are the impacts for non-US digital asset service providers?

Fabian Schär and Matthias Nadler (University of Basel) have now studied the topic from an academic perspective and opened the hood of non-custodial crypto asset mixers such as Tornado Cash. In their new paper, they not only explore what types of mixers exist and how they work. They engage in a pioneering discussion on the opportunities and risks of such mixers - and offer a visionary approach, based on voluntary disclosure, that would allow the integration of such mixing technology to regulated digital asset service providers to maintain their clients’ privacy and at the same time adhere to their due diligence obligations.

The paper “Tornado Cash an Blockchain privacy – A prime for economists and policy makers” will be published in the Federal Reserve Bank of St. Louis Review and can be accessed here. MME partner Andreas Glarner received recognition in the paper’s acknowledgements.