• 26 May, 2024
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Legal Challenges of Tornado Cash: All You Need to Know

Tornado Cash is a decentralized service that utilizes a privacy mixer to enhance privacy for crypto transactions. However, recent legal challenges have cast a shadow over its operations. Accusations of money laundering and violations of sanctions have led to arrests and charges against its founders. As legal battles unfold, the future of Tornado Cash hangs in the balance. This article will give you a clear idea of the legal challenges faced by Tornado Cash.    

What Is Tornado Cash and How Does It Work?

Tornado Cash is a decentralized service that provides enhanced privacy for cryptocurrency transactions. This privacy is achieved through the use of zero-knowledge proofs to blur or hide transaction details fully. Unlike centralized mixing services, Tornado Cash operates via smart contracts on the Ethereum blockchain, ensuring that funds remain under the user’s control throughout the mixing process.

To utilize Tornado Cash, users can deposit a certain amount of ETH. After confirming the deposit, Tornado Cash generates a random key and securely stores the deposited tokens. When a withdrawal is desired, users must provide proof of ownership of the corresponding key.

When withdrawing funds from a cryptocurrency wallet such as MetaMask, setting up a new address is crucial. By registering a new address, you prevent your withdrawal from being associated with any prior transactions or addresses related to your identity. This method enhances the security and anonymity of your Tornado Cash transactions.

The basic function of Tornado Cash is to remove the direct link between the parties conducting cryptocurrency transactions. Once the funds are deposited in the crypto pool, which contains funds from various sources, they will be mixed, thereby redistributing from their original depositors. Now, depositors can use the security key to withdraw the funds from the money mixer.   

Tornado Cash operates through the following steps:

1. Ths user selects cryptocurrency and the amount for deposit.

2. The user connects his wallet to Tornado Cash.

3. Tornado Cash generates a unique security key for the deposit.

4. Upon authorization, deposited cryptocurrency is mixed in a shared pool, dissociating it from the sender’s wallet address.

5. Withdrawals can be made by anyone with the corresponding security key, transferring cryptocurrency to their own wallet.

On August 8, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash for laundering more than $7 billion in cryptocurrencies. The OFAC also included the $445 million stolen by the Lazarus Group, which is backed by North Korea, the $96 million stolen from the Harmony Bridge Heist (June 24, 2022), and more. Brian E. Nelson, the Under Secretary of the Treasury for Terrorism and Financial Intelligence, stated

Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.

One year after the sanctions by the OFAC, on August 23, 2023, the U.S. authorities charged Roman Storm and Roman Semenov with conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate as an unlicensed money-transmitting business. The U.S. Attorney Damian Williams said that Tornado Cash was an infamous cryptocurrency mixer that laundered more than $1 billion in criminal proceeds and violated U.S. sanctions. Roman Storm and Roman Semenov allegedly operated Tornado Cash and knowingly facilitated this money laundering.

Alexey Pertsev was arrested and jailed in the Netherlands in August 2022 on vague charges. In the S-Hertogenbosch court hearings in 2023, the public prosecutor was accused of laundering more than 500,000 ETH. 

Roman Storm and Roman Semenov were two founders of Tornado Cash. After the OFAC sanctions in 2022, they continued to engage in transactions that violated the sanctions by laundering more than $1 billion while fooling the public into thinking they were in total compliance with the regulations. They even facilitated the laundering of hundreds of millions of dollars for the Lazarus Group (a cybercrime organization sanctioned by the U.S. in 2019) by transferring proceeds from criminal activities from a wallet that had been designated as blocked property by OFAC. Because of these reasons, they were charged with one count of money laundering, one count of conspiracy to operate an unlicensed money-transmitting business, and other charges. These charges carry a maximum sentence of 5 to 20 years in prison.    

The authorities managed to arrest Roman Storm in Washington state, but Roman Semenov, who is a Russian national, remains at large. The assistant director in charge of the FBI’s New York field office told CNBC,

We’re working with law enforcement, outside and inside of our agency, trying to locate and arrest this individual… We will work whatever avenues — whatever we need to do — to arrest, whether it be domestic or international.

Storm’s attorney, Brian Klein of Waymaker LLP, said that they were incredibly disappointed that the prosecutors chose to charge his client because of his help in developing software. He added that his client had been cooperating with the investigation since last year and argued that he hasn’t engaged in any criminal conduct. 

On August 25, 2022, Storm was released on a $2 million bond. In a hearing in September 2023, Roman pleaded not guilty to all charges related to money laundering and violations of United States sanctions before a judge in the Southern District of New York. 

On March 30, 2024, Storm’s legal team filed a motion to dismiss the charges alleging their client’s conspiracy to commit money laundering and violate sanctions. In response to the motion to dismiss, the DOJ opposed the decision to dismiss the case on April 28, 2024. 

Alexey Pertsev was arrested by the Dutch authorities in August 2022 and released in April 2023 to wait for the official trial. On March 26, the Dutch prosecutors formally accused Pertsev of laundering $1.2 billion worth of cryptocurrencies between July 9, 2019, and August 10, 2022. The indictment lists 40 transactions worth 535,809 ETH from various sources. The prosecutors are seeking a 64-month jail period for Pertsev. The final verdict of the trial will be delivered on May 14.    

Conclusion

In conclusion, the legal battles surrounding Tornado Cash underscore the complexities of regulating decentralized financial services in the cryptocurrency ecosystem. The arrests and charges against its founders, Roman Storm, Roman Semenov, and Alexey Pertsev, highlight the potential risks associated with such platforms. As the legal proceedings unfold, the outcome will likely shape future regulations and attitudes toward decentralized financial protocols.

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