Tornado Cash Becomes the First Smart Contract Banned by the U.S. Government

Tornado Cash Becomes the First Smart Contract Banned by the U.S. Government

The U.S. government decided to act upon the Ethereum blockchain, and it’s imposing a ban on Tornado Cash, the cryptocurrency tumbler. 

At the beginning of August 2022, the U.S. Treasury Department announced that it had banned Tornado Cash, the famous crypto-mixing service. In a move likely to have wide-reaching implications for crypto, all American “persons” are prohibited from interfacing with the open source protocol.

Circle, the issuing entity behind USDC stablecoin, immediately removed 38 addresses from their transaction history that were connected to Tornado. Anecdotal evidence suggests that bans are being enforced by other platforms and companies.

By instating this bad, the Office of Foreign Assets Control has created made it a crime to use Tornado Cash. It is now more difficult to maintain transactional secrecy for Ethereum, the most widely used blockchain. Platforms and individuals need to assess their exposure and take steps toward avoiding regulatory action. However, it’s still unclear whether or not the regulators will enforce such a ban and how blockchain protocols will comply.

What is Tornado Cash?

Tornado Cash is an open-source project that allows crypto users to hide their transactions histories from the public. It is claimed by the U.S. government that Tornado Cash was used to launder more than $103.8 million through hacks of Nomad Token Bridge and Horizon Harmony Bridge earlier in the summer and was also used by Lazarus Group, a North Korean hacker group.

The U.S. Treasury sanctioned Tornado Cash for its use by Lazarus Group, a North Korean hacker group. Also, it cited the laundering of more than $103.8 million through hacks of Nomad Token Bridge and Horizon Harmony Bridge earlier in the summer.

Since its 2019 launch, Tornado Cash was used to launder more than $7 billion worth of cryptocurrency.

Soon after the U.S. Treasury announcement, the Discord server for that group vanished, and unknown persons also took down the forum on Tornado Cash’s community website. A member of Tornado Cash’s developer group was also taken into custody in the Netherlands by law enforcement.

Who uses Tornado Cash?

Instead of pursuing identifiable bad actors or targeting hackers, the government has placed a ban on the protocol. Elliptic, an analytics firm, claimed it had found $1.5 billion worth of illicit funds through ransomware fraud, hacks, and hacks.

Chainalysis, the blockchain analysis company, released a report that claimed that the use of crypto-mixers hit an all-time high monthly level in April 2022. This was after $51.8 million had been laundered through different platforms.

Tornado is also an important component of the Ethereum money stack. While this wasn’t the only method to anonymize transactions on blockchain, or the only coin tumbler used, it was the most widely used tool. The vast majority of applications supporting ETH will have exposure to the mixing service. Even Ethereum co-founder, Vitalik Buterin, has admitted to having used Tornado Cash before donating money to Ukraine in the spring of 2022.

But a government can’t really ban a blockchain protocol

But as with any smart contract deployed on a blockchain, it can’t be shut down by any authority. Although the use of the Tornado Cash smart contract has been deemed a criminal action, the ruling can’t actually stop anyone from using it or even re-deploying its open-source code on a different blockchain.

Surely, there have been some reactions to the ban. Some Tornado Cash users have been sending small amounts of crypto to celebrities’ crypto owners. The issue is that anyone who knows your public wallet address (which is not hard to find) can send you transactions, even a transaction from Tornado Cash, and there’s no way to refuse a transaction. In this case, there can be innocent people that might have wallets that can be tied to the banned protocol – but are they really to be blamed?

While some platforms such as Circle and MakerDAO are trying to follow the rules, it is clear that blockchain financial apps can’t exist by following the archaic regulations of governments. 

The US President Issues an Executive Order on Crypto

The US President Issues an Executive Order on Crypto

U.S. President Joe Biden instructed federal agencies to coordinate efforts in drafting cryptocurrency regulations through an executive order.

According to a fact sheet accompanying the order, this governmental effort to regulate the crypto industry focuses on consumer protection, financial stability, illicit uses, leadership in the global financial sector, financial inclusion and responsible innovation.

This executive order, which is the first to be solely focused on the growing digital assets sector, directs federal agencies in communicating their work better but does not specify the positions that the administration would like agencies to take.

The order also did not set out any new regulations that cryptocurrency companies must follow.

Senior administration officials spoke neutrally about digital assets, telling reporters that the growing cryptocurrency sector could threaten the U.S. financial system and national security. Criminals could use cryptocurrency to hide funds or avoid sanctions if there is not enough oversight.

The official stated that digital assets could also offer American innovation, competitiveness, and financial inclusion opportunities. “Innovation is key to America’s story, our economy, creating jobs and new opportunities, building new industries and maintaining our global competitive edge.”

The U.S. executive order that focuses on digital assets, has six key points:

  • protecting U.S. interests
  • protecting global financial stability
  • preventing illicit uses
  • promoting “responsible innovation,”
  • financial inclusion
  • U.S. leadership

Around 40 million Americans have reported to be trading or investing in cryptocurrency, which is 16% of the entire U.S. population.

An administration official cited crypto’s volatility as one reason that investors could be hurt. He pointed out that the price of bitcoin at the start of the COVID-19 epidemic was $10,300. The price reached a peak of $69,000 in November 2021, before plummeting again at the beginning of 2022.

The official stated that the President had proposed a whole-of-government holistic approach to understand not only macroeconomic risks but also the microeconomic risk to each individual, investor, and business that interacts with these assets.

The official stated that investor protection will be a key goal. Understanding the technology that underpins digital assets is one part of this effort. Part of this effort will also include understanding the weaknesses and areas that are not serving all consumers in the current financial system.

The official stated that the order recognises that the assessment of potential risks and benefits of digital assets must also include an understanding of how the financial system meets current consumer needs in an equitable, inclusive, and efficient manner.

The “antiquated” payment infrastructure could make it difficult for consumers to access services. This was especially true for cross-border payments, the official stated.

The future of money 

A section of the order directs U.S. Treasury Department officials to prepare a report about “the future money and payment system.”

The effects of cryptocurrencies on economic and financial growth will be observed to the extent that technological innovation may influence that future.

Last November’s President’s Working Group report called for Congress to pass a bill that more clearly defines federal bank regulators’ oversight power over stablecoins. Moreover, the Financial Stability Oversight Council could act in place of legislation.

Yellen mentioned FSOC’s role, saying that the financial stability watchdog would examine any potential risks posed in the cryptocurrency sector and “assess whether appropriate safeguards” are already in place.

Digital dollar

In the executive order, the U.S. will ask agencies to assess how they could issue a CBDC (central bank digital currency). 

This order is tied to the Federal Reserve’s ongoing efforts to study digital currency issuance. In recent months, branches of the central bank published numerous reports evaluating both technological and policy questions before a central bank digital money (CBDC).

According to the administration official, CBDCs are being considered by more than 100 countries. These use cases can include both domestic and international transactions.

The official stated that many of these countries were also working together to establish standards for CBDC design, and cross-border systems.

How is the Federal Reserve Bank of NY affecting the crypto market

How is the Federal Reserve Bank of NY affecting the crypto market

The coronavirus outbreak is affecting all areas of our lives and a financial crisis seems to be knocking at our door. On March 12, the Federal Reserve Bank of New York announced the offering of $1.5 trillion in loans to banks. These short-term loans are meant to “address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak”.

The distribution of the sum has been divided into weekly batches.

On the same day of the New York Fed’s announcement to inject money into the bond market in their attempt to stabilize it, the Dow Jones industrial average index (the stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States) went down by 10%.

The New York Fed also announced that it will buy $60 billion worth of Treasury bonds over the next month, starting with March 13. The problems reported by investors over the past week reminded the Fed about the 2008 financial crisis and that’s why it has decided to act so quickly.

What happened to the crypto market after WHO declared the Coronavirus pandemic

On March 11, the World Health Organization (WHO) declared Covid-19 a pandemic, after considering over 120 000 cases of infection and over 110 countries affected by the spread of the virus.

According to Dr Tedros Adhanom Ghebreyesus, WHO director-general:

“This is not just a public health crisis, it is a crisis that will touch every sector,”

“So every sector and every individual must be involved in the fights.”

One day later, on March 12, the price of Bitcoin lost over $1,000 in value in under 30 minutes and the depreciation continued to values comparable to last year’s prices.

Bitcoin, the most known cryptocurrency lost 50% of its value in a matter of hours, and at some point dipped under the $4,000 benchmark.

By March 13, Bitcoin had recovered some of the lost value, and it was trading at almost $6,000.

Following the March 12 plunge, Bitcoin continued to lose value over the weekend, and the sudden increase in volatility made some analysts reconsider if Bitcoin is or ever was a safe-haven asset.

Other top cryptocurrencies have seen major value losses during the same time.

Is crypto in a bear market?

The stock and crypto markets are in a bear market after the response of the US Federal Reserve to the Coronavirus crisis to diminish interest rates to near zero. The crypto market registered a brief fall after this announcement on Friday, March 15.

Anthony Pompliano, the founder of Morgan Creek, told Decrypt:

“I don’t make calls on short term price movements, but I generally think the Fed’s actions are (a) going to be proven to be ineffective and (b) are bullish for Bitcoin long term,”

This was the second initiative of the Fed to aid confidence in the financial markets.

On Sunday, the Fed Chairman, Jerome Powell, stated during a conference:

“We will maintain the rate at this level until we’re confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals,”

Blockchain to aid the Coronavirus crisis

Timothy Mackey, an adjunct professor at the UC San Diego, has added blockchain solutions to teach on his global health policy course, which has the coronavirus crisis at the core.

The goal is to point out the faulty points in supply chains to health officials and to identify which hospitals from around the world are prepared to treat patients.

Others are trying to profit off the coronavirus crisis publicity and have issued Coronacoin, which destroys coins every 48 hours, based on the number of new global infection cases and deaths.

What are the crypto enthusiasts responding to the Coronavirus crisis