The US sanctioning of a prominent cryptocurrency platform this week exposed technical gaps in the government’s ability to prevent criminals, domestic adversaries and extremist groups from using the services to launder money and finance their operations.
Among the central challenges: Cryptocurrency platforms are increasingly run by computer code distributed among computers around the world, rather than people facilitating transactions, analysts said.
The Treasury Department on August 8 imposed sanctions against Tornado Cash, a popular cryptocurrency platform known as a mixer because it combines funds from different users and redistributes them, obscuring their origin. The Treasury Department accused Tornado Cash of laundering billions of dollars in virtual currency, including $455 million allegedly stolen by North Korean hackers. As part of the sanctions, officials froze all of the stock’s assets under US jurisdiction and barred US companies and individuals from transacting with it.
Analysts said the sanctions would hamper Tornado Cash’s growth by discouraging users and major cryptocurrency exchanges that are reluctant to trade on a blacklisted platform. This will reduce the amount of funds flowing in and out of Tornado Cash.
Circle Internet Financial, the issuer of the so-called stablecoin that tracks the US dollar, blocked the sanctioned wallet addresses after the August 8 announcement, effectively freezing the funds in those wallets.
“Almost all responsible registered virtual asset service providers are also likely to have taken steps to prevent clients from transacting with these addresses or face charges for deliberately avoiding US sanctions compliance obligations,” Circle CEO Jeremy Allaire wrote on Twitter.
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But almost as soon as the sanctions were announced, some users began trying to exploit perceived shortcomings in the government’s effort. For example, funds can still be transferred out of cryptocurrency wallets on the platform, and its software code, used to initiate transactions, can be replicated and relaunched elsewhere.
“It’s difficult, if not impossible, to completely shut down Tornado Cash,” said Tom Robinson, co-founder of risk management firm Elliptic Enterprises, which analyzes illicit use of crypto services.
The developers of Tornado Cash designed the service to allow users to exchange cryptocurrency with little or no information about the parties, unlike traditional financial institutions that are usually required to collect information about their account holders. This appeals to users drawn to crypto for privacy and security: Some Twitter users said this week that they used Tornado Cash to send cash to support Ukrainians suffering from Russia’s invasion. But the lack of disclosure also creates opportunities for illicit transactions, Robinson said.
Tornado Cash’s code is not hosted by a person or company, but lives on the Ethereum blockchain, a global decentralized network of computers, where it automatically performs operations.
As a result, the United States and other governments have no individual or entity that can compel Tornado Cash’s operations to stop. Even when Microsoft’s GitHub removed the last copy of the platform’s code from its website after the sanctions were announced on August 8, some users had already copied the files.
The developers of Tornado Cash have described it as a privacy app that technically does not contain user deposits, because they are mixed with other funds. Its original developers say they no longer have control over the platform. Like many other decentralized finance projects, Tornado Cash is overseen by an online community of people who hold tokens that allow them to vote on government changes.
Crypto analysts also see other workarounds that fans of the platform are exploiting. The sanctions will prevent most centralized cryptocurrency exchanges from touching the platform, but people can create their own cryptocurrency accounts without touching a major exchange, allowing people to send funds to whoever they want. Wallet owners do not need to consent to receive coins.
It appears that an anonymous user is already sending small amounts of ether tokens from sanctioned Tornado Cash crypto wallet addresses to wallets belonging to prominent crypto figures including Coinbase CEO Brian Armstrong, major celebrities and the clothing brand Puma, according to blockchain data. A spokesman for Coinbase declined to comment.
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A Puma spokesperson confirmed that the company’s crypto wallet received a “small, unauthorized payment” of approximately 0.075 Ether, equivalent to $137, from Tornado Cash.
“PUMA has no business relationship with Tornado Cash and had no prior knowledge of the payment. This matter is currently under investigation,” the spokeswoman told The Wall Street Journal.
After years of cautious restraint by federal agencies, a series of actions in recent months have demonstrated the Biden administration’s desire to target the virtual currency ecosystem itself to disrupt the tools that criminals use to steal or extort funds and then launder them in cash.
As the market grows and becomes increasingly mainstream, it has been used to facilitate lucrative criminal operations, including ransomware attacks and the alleged theft of hundreds of millions of dollars in cryptocurrency from North Korea. Crypto advocates argue that these transactions are a small percentage of overall digital asset trading.
Eun Young Choi, the first director of the National Cryptocurrency Enforcement Team created last year at the US Department of Justice, said at a recent conference in New York that investigators had improved their ability to track and prosecute cryptocurrency cases. An upcoming Justice Department review, due in early September, is expected to detail the authorities’ current enforcement challenges and could offer regulatory or legislative changes to support enforcement.
The Justice Department declined to comment.
Vicky Ge Huang contributed to this article.
Email Caitlin Ostroff at caitlin.ostroff@wsj.com and Dustin Volz at dustin.volz@wsj.com
This article was published by The Wall Street Journal, part of Dow Jones
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