The US Treasury Department recently sanctioned Tornado Cash, an Ethereum blockchain-based crypto-mixing service.
According to US officials, the mixing service was used by cybercriminals to launder over $7 billion worth of cryptos obtained through illicit activities like ransomware. The agency accused the mixing service of allowing hackers, including state-sponsored actors from North Korea, to use its platform to launder their ill-gotten cryptos.
But what is a crypto mixing service?
The blockchain provides us with a record of the source and destination addresses for every transaction, which effectively means that transactions on the blockchain can be traced. In fact, this is how law enforcement agencies trace illegitimate cryptos.
Cryptocurrency mixers like Tornado Cash help crypto users make their transactions anonymous and harder to trace. They do this, as their name suggests, by mixing one user’s funds with others on the blockchain, making it virtually impossible to identify the source of a transaction.
Different mixing services use different means of mixing the funds, but the basic principle remains the same. Generally speaking, you simply enter the wallet address to which you’d like the mixed coins to be sent and then deposit your cryptos to the provided address.
Behind the scenes, the service takes funds from various crypto users in a common pool and then pays them back an equal amount of cryptos. Since the outgoing cryptos are likely to have originated from different sources, the service essentially helps mask the real source of the funds.
The services sustain themselves by usually charging a commission between 1-3% of the amount mixed.
While it would appear that such a mixing service would lend itself to illicit users, there are perfectly legitimate reasons for using such a service as well.
Privacy is one of the big reasons why anyone would like to use a mixing service. Since the transactions can be traced, it doesn’t take much effort to figure out the uncomfortable details about the finances simply through a user’s wallet address. For such users, crypto mixers help reclaim some financial privacy.
The sanctioning of Tornado Cash has split the crypto community. Proponents of the service are arguing that anonymity isn’t a crime, and the sanctions trample upon their right to privacy. On the other hand, critics of such mixing services applaud the action, claiming it’ll discourage criminals from using the platform to hide and launder illicit funds.
However, analyzing the sanction is a discussion we’ll leave for another day.