Tornado Cash is a cash mixer or tumbler that is accused of laundering money from criminals using cryptocurrencies.
Traditionally, nations have central banks (e.g. U.S. Federal Reserve Bank) that issue and control currencies like the U.S. Dollar. Currency is money or a medium of exchange. The control of the circulation of currency is centralized in the central bank.
The central banks use their authority to control the amount of currency in circulation. They do this in part by controlling interest rates and issuing new or redeeming old banknotes. These measures are used to stimulate the economy by reducing the cost of money thereby increasing circulation. They deal with inflation and a runaway economy by increasing interest rates thereby reducing circulation.
Transactions in government-issued currencies are relatively transparent. We say relatively because crooks regularly use money laundering to hide ill-gotten gains. But money laundering with traditional centralized currencies can still be traced.
A cryptocurrency is a digital decentralized currency system. It has been around in its current form only since the creation of Bitcoin in 2009. Ever since central banks have had difficulty understanding it let alone creating measures to deal with its faults.
Since the inception of cryptocurrency, governments have been concerned about the loss of centralized control of the volume of a cryptocurrency. Crypto is “mined” by anyone with a powerful computer system and ready access to an enormous amount of electric energy. There is no central control over the amount of crypto mined.
The most serious fault is that cryptocurrency is a decentralized system that, so far, is not within the jurisdiction or control of the central banks, and cryptocurrency transactions are private and secret. The secrecy of crypto transactions is touted as a principal advantage of crypto. They are particularly attractive to drug dealers and other criminals because of their secrecy.
Contrary to the prevailing reputation, crypto trades are not 100% secret. Every blockchain transaction is digitally booked in an account. With much effort, a digital record of a transaction can be traced by a blockchain explorer.
So the crypto experts invented the coin mixer or tumbler. The mixer works as a middleman or intermediate digital step. Party A might want to send 10 Bitcoins to Party B. That transaction could be traced on a blockchain explorer.
If either Party wants to assure secrecy, Party A would send the 10 Bitcoins to a digital coin mixer where they would tumble around like a lottery ball and eventually spit out the other end to Party B. As far as the two Parties are concerned their only transaction was with a coin mixer.
There are two types of coin mixers
• Centralized mixers
• Decentralized mixers
A centralized mixer does not offer total secrecy because while the link between the “incoming” and “outgoing” bitcoin will not be public, the centralized mixer will record the connection between them.
Decentralized mixers are formed by a large group of users who throw cryptos into a large digital pool. Transactions among users are conducted by contributions and withdrawals from the pool. The substantive connections between the two real parties can’t be traced.
Coin Mixer Sanctions
There are various coin mixers doing business. Some of that business is illegal or facilitates illegal activities. Tornado Cash is a popular Ethereum-based coin mixer. It is aptly named because ether transactions are tossed into a tornado funnel and are thrown out randomly. We don’t know where they originated and were sucked into the funnel.
The U.S. government recently sanctioned Tornado Cash. The U.S. Treasury press release read:
“Today, Treasury is sanctioning Tornado Cash, a virtual currency mixer that launders the proceeds of cybercrimes, including those committed against victims in the United States. Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors regularly and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”
The sanction means that U.S. citizens and businesses are prohibited from using the Tornado Cash platform for crypto trades.
Exchanges have also taken action against illegal cash mixers. For example, the Binance exchange has blocked withdrawals to Wasabi a bitcoin wallet that uses the mixing services of CoinJoin. The Justice Department has labeled as a crime the use of mixers to hide crypto transactions.
Tornado Cash might not be far behind criminal action by the Department of Justice. The DOJ arrested the founder of Bitcoin Fog for facilitating the illegal laundering of $335 million since 2011. In August 2021, the owner of bitcoin mixer Helix pleaded guilty to the felony of laundering $300 million for criminals.
Regulators like the U.S. Financial Action Task Force and the European Union’s AMLD-5 have adopted rules that will make laundering money by bitcoin mixers and other means more difficult.
Unfortunately, crypto geeks never sleep. They continually seek alternatives to mixers to conceal illegal crypto transactions. Regulators, as soon as they issue anti-mixing regulations, are confronted with new devices. China simply banned all crypto mining and transactions. Money laundering is not the only problem. The complexities and volatility of crypto are ignored by advertisers of crypto as seen on the telecast of the 2022 Super Bowl.
Many uneducated investors were taken in for investments in Bitcoin at $65,000 which plummeted over the first few months of 2022 to less than $25,000. Trading on crypto exchanges is not subject to limitations on leveraged investments on margin. Investors were hit with enormous margin calls.