Tornado Cash (Crypto dApp) added to US Sanctions List - Explanation

Summary

In this Whiteboard Crypto video, the host dives into Tornado Cash, a privacy-focused Ethereum-based tool that anonymizes crypto transactions. Despite its legal uses, it's been added to the U.S. sanctions list, making it illegal for U.S. citizens to interact with it. The implications of this decision are explored, including potential consequences for decentralized finance (DeFi), the challenges of maintaining privacy in a regulated environment, and the broader impact on privacy coins like Monero.

Takeaways

• 🚂 Tornado Cash is a decentralized application (DApp) built on the Ethereum blockchain that anonymizes cryptocurrency transactions by mixing them with others.
• 👤 The creator of Ethereum, Vitalik Buterin, has used Tornado Cash, indicating its significance and utility within the crypto community.
• 🔒 Tornado Cash was added to the U.S. sanctions list, making it illegal for U.S. persons to engage with it, including depositing or withdrawing funds.
• 🚨 The sanctions could lead to severe penalties, including up to 30 years in federal prison for violations related to Tornado Cash.
• 🏦 Centralized entities like USDC's issuer, Circle, may block transactions associated with Tornado Cash due to compliance with U.S. regulations.
• 💡 The utility of Tornado Cash and similar mixers increases with more users, but sanctions could deter usage, making transactions easier to trace.
• 🛑 Second-order consequences of the sanctions include the potential for centralized exchanges to block transactions associated with Tornado Cash.
• 🛡️ Users may face risks of being blacklisted or having their accounts suspended if they unknowingly receive 'tainted' funds from sanctioned addresses.
• 🔄 The possibility of forking Tornado Cash to create a new, unsanctioned version is limited by the need for significant funding and time to establish trust.
• 🔑 Legislation often lags behind technological advancements, creating a continuous cycle of new technologies being developed and then sanctioned.
• 📉 The implications of Tornado Cash's sanctions could extend to privacy coins like Monero, potentially affecting their listing on U.S. exchanges and future development.

Q & A

What is Whiteboard Crypto?

Whiteboard Crypto is a YouTube channel that focuses on cryptocurrency education, explaining complex topics using analogies, stories, and examples to make them easily understandable.

What is Tornado Cash?

Tornado Cash is a decentralized application (dApp) that operates on the Ethereum blockchain, functioning as a mixer to anonymize transactions by mixing users' crypto with others, attempting to erase the transaction history of a token.

Why is Tornado Cash significant in the context of the video?

Tornado Cash is significant because it has been added to the U.S. sanctions list, which has implications for its use and the future of privacy-focused dApps.

What does the video suggest about the creator of Ethereum's relationship with Tornado Cash?

The video mentions that the creator of Ethereum has used Tornado Cash multiple times, indicating its utility and relevance in the crypto community.

What is the purpose of the Office of Foreign Assets Control (OFAC)?

The OFAC is a U.S. government agency that investigates and compiles a list of individuals, groups, and entities with whom U.S. citizens and businesses are prohibited from conducting transactions.

What are the consequences of Tornado Cash being added to the OFAC sanctions list?

The addition to the sanctions list makes it illegal for U.S. persons to engage with Tornado Cash, including depositing or withdrawing funds, donating to the project, or even mining transactions associated with it.

What is the potential jail time for violating the sanctions against Tornado Cash?

The maximum jail time for violating the sanctions against Tornado Cash could be up to 30 years in federal prison.

How can centralized tokens like USDC potentially interact with Tornado Cash post-sanctions?

Centralized tokens like USDC can be blocked by their issuing companies from being deposited or withdrawn from accounts associated with Tornado Cash due to the token's smart contract functionalities.

What are the second-order consequences of Tornado Cash being sanctioned?

Second-order consequences include the potential for tokens to block usage of the platform, centralized exchanges blocking transactions associated with the platform, and ISPs potentially blocking access to Tornado Cash's website.

What does the video suggest about the future of privacy coins like Monero in relation to Tornado Cash sanctions?

The video suggests that if the U.S. can sanction a dApp like Tornado Cash, it could also potentially sanction privacy coins like Monero, which could impact their listing on exchanges and overall usability.

What is the video's stance on the effectiveness of Tornado Cash after being sanctioned?

The video posits that the effectiveness of Tornado Cash is diminished after being sanctioned, as fewer users will engage with it, making it easier to track transactions and potentially leading to a loss of trust in decentralized applications.

What is the video's final takeaway regarding Tornado Cash and its implications?

The video concludes by emphasizing the need for understanding the implications of Tornado Cash's sanctions, the challenges it presents for privacy in cryptocurrency, and the broader questions it raises about the future of decentralized applications and privacy coins.

Outlines

00:00

🚂 Introduction to Tornado Cash and U.S. Sanctions

This paragraph introduces the topic of Tornado Cash, a privacy-focused decentralized application (dApp) on the Ethereum blockchain, which has recently been added to the U.S. sanctions list. It explains the basic concept of Tornado Cash as a mixer that anonymizes cryptocurrency transactions by mixing them with others, making transaction tracking difficult. The creator of Ethereum has reportedly used this dApp. The video aims to explain the implications of these sanctions and the future of dApps that the U.S. disapproves of. It uses an analogy of hiding in a crowd wearing the same color shirt to illustrate the concept of privacy and anonymity in transactions.

05:00

🔒 Understanding the Impact of U.S. Sanctions on Tornado Cash

This paragraph delves into the consequences of Tornado Cash being added to the Specially Designated Nationals (SDN) list by the U.S. government, which prohibits U.S. persons from engaging in trade or dealings with the dApp. It discusses the potential legal repercussions for U.S. individuals, including the possibility of up to 30 years in federal prison for violations. The paragraph also highlights secondary effects, such as the need for tokens to prevent usage of Tornado Cash, the potential for mining software to blacklist transactions, and the possibility of centralized exchanges blocking transactions associated with the sanctioned dApp. It also touches on the potential for ISPs to block access to Tornado Cash's website and the implications for blackmail using tainted funds.

10:01

🔑 The Challenges and Potential Solutions Post-Sanctions

The final paragraph discusses the challenges faced by Tornado Cash and the broader implications for privacy coins like Monero. It raises the question of how effective a fork of Tornado Cash could be, given the need for significant funds and time to achieve the same level of anonymity as the original. The paragraph also speculates on the potential for legislation to lag behind technological advancements, suggesting a continuous cycle of new technologies being developed and subsequently sanctioned. It concludes with a hypothetical scenario where Monero could be affected by similar sanctions, leading to its removal from U.S. exchanges and impacting its development and price.

Keywords

💡Tornado Cash

Tornado Cash is a decentralized application (dApp) built on the Ethereum blockchain that functions as a crypto mixer or tumbler. It anonymizes transactions by mixing users' cryptocurrencies with others, making it difficult to trace the origin of funds. In the video, Tornado Cash is central to the discussion about its implications on privacy and the recent U.S. sanctions against it.

💡Cryptocurrency Anonymity

Cryptocurrency anonymity refers to the ability to conduct transactions without revealing one's identity. The video uses the analogy of a 'red shirt convention' to illustrate how Tornado Cash mixes transactions to obscure their origins, thereby providing a degree of privacy to users, which is a key theme of the video.

💡Ethereum

Ethereum is a decentralized, open-source blockchain system that features smart contracts and is the platform on which Tornado Cash operates. The video mentions Ethereum as the underlying technology that enables the functionality of Tornado Cash.

💡Decentralized Application (dApp)

A decentralized application (dApp) is an application that operates on a blockchain rather than being controlled by a single entity. Tornado Cash is an example of a dApp, and the video discusses its decentralized nature and the challenges it faces due to U.S. sanctions.

💡U.S. Sanctions

U.S. sanctions refer to the economic and trade restrictions imposed by the United States government on certain entities, individuals, or activities. In the video, Tornado Cash being added to the sanctions list is a pivotal event that affects its legality and usage for U.S. persons.

💡Office of Foreign Assets Control (OFAC)

The Office of Foreign Assets Control is a U.S. government agency responsible for implementing and enforcing economic sanctions. The video explains that OFAC has added Tornado Cash to the SDN list, which has significant implications for its use and interaction.

💡Specially Designated Nationals (SDN) List

The SDN List is a document maintained by OFAC that identifies individuals and entities with which U.S. persons are generally prohibited from conducting business. The video mentions Tornado Cash's addition to this list, marking it as an entity that U.S. persons cannot legally engage with.

💡Money Laundering

Money laundering is the process of making illegally-gained proceeds appear legal. The video discusses how tools like Tornado Cash can be used for illicit purposes such as money laundering, which is a key concern for regulatory bodies imposing sanctions.

💡Fungibility

Fungibility in the context of currency means that one unit is interchangeable with another. The video uses the concept of fungibility to explain the importance of privacy in transactions, likening it to the utility of money when its history is unknown.

💡Smart Contracts

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. The video mentions that some tokens, like USDC, have smart contracts that can block transactions with sanctioned entities, illustrating the intersection of technology and regulation.

💡51% Attack

A 51% attack refers to a scenario where a group of miners controls more than 50% of a cryptocurrency network's mining hash rate, potentially allowing them to manipulate transactions. The video uses this concept to explain how miners could be coerced into not processing transactions for sanctioned entities.

💡Privacy Coin

Privacy coins are cryptocurrencies designed to provide a higher degree of anonymity than traditional cryptocurrencies. The video raises the question of how U.S. sanctions on dApps like Tornado Cash could extend to privacy coins like Monero, affecting their usability and value.

Highlights

Tornado Cash is a tool on the Ethereum blockchain that anonymizes crypto transactions by mixing them with others.

The creator of Ethereum has used Tornado Cash, as mentioned in a 2020 tweet.

Tornado Cash works by mixing your crypto with others, similar to hiding in a crowd wearing the same color.

The video uses an analogy of a red shirt to explain the concept of transaction obfuscation.

Tornado Cash's utility is affected by the number of users, similar to how a crowd's size impacts anonymity.

The video encourages viewers to join a newsletter for updates and free educational content.

Tornado Cash's addition to the U.S. sanctions list makes it illegal for U.S. persons to interact with it.

The sanctions list includes entities like Cuba, Iran, Iraq, and North Korea, with Tornado Cash recently added.

The Office of Foreign Assets Control (OFAC) is responsible for investigating and creating the sanctions list.

Sanctions on Tornado Cash could deter usage and make transactions easier to track.

Tokens like USDC, Tether, and Wrapped Bitcoin may block transactions associated with Tornado Cash due to sanctions.

Ethereum miners could update their software to blacklist transactions related to Tornado Cash.

Centralized exchanges may block transactions associated with Tornado Cash to comply with sanctions.

ISPs could block access to Tornado Cash's website, affecting its usability.

The video discusses the potential for blackmail using tainted funds sent to an unsuspecting user's address.

Forking Tornado Cash could be a solution, but it requires significant resources and time to be effective.

The video raises the question of the implications of U.S. sanctions on privacy coins like Monero.

The video concludes by emphasizing the challenges of legislation keeping pace with rapidly evolving technology.

A free D5 for beginners guide is offered by Whiteboard Crypto for further education on the topic.

Transcripts

this is a really big deal even if it

doesn't seem like it so buckle up and

get ready for this crazy train of a

video welcome to whiteboard crypto the

number one youtube channel for crypto

education and here we explain topics of

the cryptocurrency world using analogies

stories and examples so that anyone can

easily understand them in this video

we're going to explain what tornado cash

is what the implications of it being

added to the u.s sanctions list are and

what it means for the future of dapps

that the united states does not like

first off let's get into the tornado

cache now before i explain what it is

and how it works i want to share that

the actual creator of ethereum himself

has used this dapp many times per a

tweet that he shared in 2020. now

tornado cash is a tool that is run on

the ethereum blockchain and it's called

a tumblr or a mixer now these are just

fancy yet descriptive words to describe

what it does we do actually have an

entire video on this topic but to put it

simply tornado cache simply mixes your

crypto with a bunch of other people's

crypto to be able to anonymize it in

other words it attempts to erase the

transaction history of a token now in

reality you can never erase the

transaction history of a token but you

can try to do so by using a simple

method let me explain this with a fun

analogy let's say you're running from

the police they didn't see your face but

they know that you're wearing a red

shirt this is all that they know about

you what's the best place to hide well

it sure would be nice if you had a

warehouse full of people that are also

wearing red shirts to hide in you could

slip into this warehouse hang around for

a few hours while the police start

asking some questions then you could

sneak out a few hours later the police

know that people are entering with red

shirts and that they're leaving with red

shirts because apparently it was a red

shirt convention and they can't stop

people from leaving so effectively

you've hidden yourself by making it

impossible for the police to identify

you now in this story just replace

police with your neighbor your mom or

someone trying to sue you and you can

see the other side of privacy before we

go much further if you've appreciated

how simple that analogy was feel free to

hit the like button and while you're

down there there's also a link to join

our newsletter too it's absolutely free

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on them sometimes i do giveaways and

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series so feel free to join below if you

think this video is something that you

like learning about moving on with

crypto tumblers like tornado cash you

are doing a very similar activity as

running around with a red shirt now

there are perfectly legal reasons to do

this such as privacy concerns imagine if

every dollar bill that you had contained

an entire list of where that dollar had

been spent maybe walmart some local drug

dealers name the vending machine at your

local hotel maybe it was sent overseas

to fight a war that you don't approve of

maybe it was sent through campaign funds

to a local politician and then finally

it made it back to you in this case

money sure is more useful when it's

fungible but that's for another video

however there are also very illegal

reasons to do this such as money

laundering otherwise known as trying to

hide money that you got by stealing from

smart contracts or scamming people

online so now that we know how tornado

cash works and what it's used for let's

get into what the u.s sanctions are

basically there's this organization

called the office of foreign assets

control which is a government agency

that investigates who the us should be

blocked from doing business with

obviously we shouldn't be doing business

with criminals right well they put

together this special list called the

sdn or specially designated national and

blocked persons list and this contains a

list of people groups of people and

things that are now illegal to interact

with some of these countries include

cuba iran iraq and north korea but

recently tornado cash was added to the

list this means it is now illegal for

any u.s person to engage in trade or

perform other dealings with a

decentralized application known as

tornado cash now for starters this means

you definitely shouldn't be using it but

it also means you shouldn't be

depositing funds into the contract or

withdrawing funds from the contract even

if you put those funds in there before

it was sanctioned but to go even further

it could also mean donating to the

project which is found on git coin

adding code to the project or even

visiting the website more questionably

you might even be guilty if you're found

mining a transaction that interacts with

the application the maximum jail time if

convicted could be up to 30 years in

federal prison now i know what you're

thinking this is crypto they can't block

a decentralized application right well

technically it is decentralized and they

said it was very difficult to take down

or prevent these transactions however

putting it on the sanctions list is

going to have a ton of second order

consequences let's get into those for

starters any tokens used on the platform

must prevent usage of that application

if possible so here's one example usdc

which is a token created by the company

circle actually has a few functions in

their token smart contract to do some

pretty clever things in fact clever can

block their usdc token from being

deposited into any account or being

withdrawn from any account on the

blockchain level now lots of people

don't know this but usdc is actually

quite centralized and being a

us-governed company circle is very

likely to block any of the addresses

associated with tornado cash so now usdc

can't be used with tornado cash big deal

right well there are actually a few

other tokens that operate the same way

two of the most used being tether and

wrapped bitcoin now you might argue

tornado cash is still effective for

mixing ethereum though right and you'd

be mostly correct however by being on

the sanctions list there are many people

who will be deterred from using it in

fact tornado cash becomes exponentially

more useful the more people that use it

so if less people are using it then it

becomes much easier to track those

transactions going through it back to

our red shirt analogy would it be easier

for the police to track you if you went

into a room of 10 people or a room of 1

000 people now moving on as i mentioned

earlier you may even be committing a

crime if you are mining ethereum and you

process a transaction associated with

tornado cash now one simple way around

this is that the ethereum miner software

could be updated with a blacklist or a

list of accounts to never process

transactions for which is a totally

viable thing to do and it's very similar

to the result of a 51 attack they just

said here are a list of addresses not to

process transactions for and then the

software just ignores them and never

processes them now this is a very scary

thing to do purposefully and will likely

remove a lot of trust in so-called

decentralized applications another

second-order consequence this will

create is that centralized exchanges may

start blocking or reporting any

transactions to their accounts that they

think may be associated with the

sanctioned accounts now of course when

you sign up to these exchanges they

collect your name your social security

number your address and basically enough

personal information to identify you and

your incoming transactions this will

basically get rid of the on-ramps and

off-ramps for people to be able to turn

their sanctioned money into cash now one

other thing worth mentioning is that

access to the tornado cache website can

actually be blocked by your isp or the

company that gives you internet they can

simply block any tornado cache web

assets from being delivered to your

address and they can also prevent any

dns domain name lookups from resolving

tornado.cache to an ip address

effectively preventing you from using

them now some developers out there might

say this simply blocks the user

interface to tornado cache though since

tornado cache is a smart contract if you

know the contract address you can still

interact with the contract let's move on

to another topic though let's talk about

blackmail what if someone sends you

tainted funds can someone blackmail you

by sending you a large sum to your

address personally there have been many

situations where i simply just empty out

one of my ethereum wallets over to

coinbase to be able to withdraw trade or

move that money somewhere else if i had

say been sent five dollars of ethereum

from a sanctioned address without

knowing it then i would have simply

deposited a hundred dollars got a five

dollar gift and then withdrawn 105 and i

would have just assumed that five

dollars was market fluctuations when in

reality it was someone trying to taint

my account however if coinbase has a

list of blacklisted addresses and they

see that i got money from one of those

bad addresses they might also assume

that i was doing business with a bad

actor and they could suspend my account

or possibly even keep my funds this

leaves a question of how far back can we

reliably trace bad funds maybe we set a

limit of 100 accounts money has to go

through 100 accounts before you can say

that you're definitely not associated

with the dirty money are you still

liable for violating the sanctions well

we could put this idea in effect but

this is a bad idea because i could

technically write a script that moves

ethereum between 100 different accounts

in a few minutes so this would be a very

easy loophole for someone to perform

next up let's move on to a possible

solution of these sanctions that some

have already thought of you could fork

tornado cash right well the problem with

this is that the fork will need lots of

money and lots of time remember the more

red people there are in the room the

better the protocol works anonymizing

your funds if there's only a million

dollars in the next protocol it won't be

as effective as if they could get a

hundred million dollars locked up in it

as of right now tornado cash has a

little more than 400 million locked up

in it one thing to keep in mind is that

it seems legislation can't keep up with

the rate of new technology tornado cash

has been around for a long time and sure

someone can make tornado cash 2.0 which

isn't sanctioned but when the tvl

reaches a high enough number when enough

money is locked up into the new version

it'll be sanctioned again and then again

and again but there will always be a

delay between builders and legislators

one last question i want to leave you

with is what does this mean for monero

monero is a privacy coin it's like if

you took every transaction of ethereum

and ran it through tornado cash well if

the us can add a dap to the sanctions

list then they can definitely add a coin

this would be very bad for manero as it

would ensure that all u.s exchanges

removed monero from their listings which

would greatly prevent people from

trading the asset this doesn't mean it

would be the end of monero but it would

probably not be good for future

development or for price action wrapping

this video up hopefully you have a

better understanding of what tornado

cash is what it does how it's been

affected by u.s sanctions and what it

means moving forward as i end this video

i want to remind you about that free d5

for beginners guide that you can get by

going to whiteboardcrypto.com and

entering your email or you can just

click the link in the description thank

you so much for watching this video i

hope you enjoyed it i really hope you've

learned something and most of all i hope

to see you in the next video