Tornado Cash (Crypto dApp) added to US Sanctions List - Explanation
Summary
TLDRIn 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
🚂 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.
🔒 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.
🔑 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.
Mindmap
Keywords
💡Tornado Cash
💡Cryptocurrency Anonymity
💡Ethereum
💡Decentralized Application (dApp)
💡U.S. Sanctions
💡Office of Foreign Assets Control (OFAC)
💡Specially Designated Nationals (SDN) List
💡Money Laundering
💡Fungibility
💡Smart Contracts
💡51% Attack
💡Privacy Coin
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
and i usually send out emails on my
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become videos just to get some feedback
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
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