Stanford Blockchain has published a review of the US-sanctioned virtual crypto mixer, Tornado Cash. The review gives a detailed description of Tornado Cash, how it works, smart contract architecture, and recent legal developments.
The Tornado Cash Review – Stanford’s Perspective
Stanford Blockchain describes Tornado Cash as a decentralized, non-custodial privacy solution built on the Ethereum blockchain.
The solution allows users to improve the anonymity of their crypto transactions by breaking the onchain link between the source and destination address.
As part of the review, the working process of the protocol was split into three distinct parts. This includes the Locking Tokens, Anonymity Set, and Unlocking Tokens.
These processes help users obfuscate the status of a transaction with difficulty in tracing the sources.
Unlike a bank or a centralized exchange, Tornado Cash is non-custodial, meaning third parties do not control users’ assets.
– Advertisement –
In August 2023, the US Department Of Justice (DOJ) announced an indictment against Tornado Cash’s founders. Founders Roman Storm and Roman Semenov went in.
The founders were charged with conspiracy to engage in unlicensed money transmission, violating 18 USC 1960, a powerful criminal statute.
According to the government’s theory, the crypto mixer falls within Section 1960 because the smart contracts transfer funds on the public’s behalf.
However, Standford Blockchain has argued in its review that the DOJ is wrong with its recent interpretation of Section 1960.
According to the institution, the process of interacting with the Tornado Cash protocol in terms that differ from the code in the smart contracts themselves.
Stanford claims the DOJ’s prosecution exemplifies the dangers of allowing unelected officials to stretch statutory language to address novel challenges.
The paper added that the DOJ’s stance threatens to undermine the delicate balance of privacy and regulation in the digital era.
Tornado Cash Sanction, Opposition, and Victory
The US Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash in August 2022.
The agency claimed that Tornado Cash enabled money laundering by failing to implement sufficient controls to prevent criminals from depositing stolen crypto.
OFAC accused the crypto mixer of laundering approximately $7 billion in crypto since its inception in 2019.
The laundered assets include $445 million hacked by the Lazarus outfit, a well-known North Korean hacker group facing US sanctions.
However, the U.S. Fifth Circuit Court of Appeals has ruled that sanctions against the crypto mixer are unlawful.
The court found that OFAC overstepped its legal authority on this matter. The Court held that the immutable smart contracts in the appeal are not property because they cannot be owned.
The verdict immediately impacted the crypto market. TORN, Tornado’s native token, soared from $2.70 to over $30, representing a 1,000% rise.
Role of Circle Internet Financials in the Review
In an X post, Circle’s CEO Jeremy Allaire revealed the firm’s legal and research team partnered with Stanford for the crypto mixer’s review. Many crypto community members have commended Circle Allaire for restoring crypto values.
From @circle legal and research in partnership with Stanford Blockchain Review – one of the most important issues of our time for the future of crypto and the internet. Tornado Cash and the Limits of Money Transmission. https://t.co/XzbEJZ0oqI
— Jeremy Allaire – jda.eth / jdallaire.sol (@jerallaire) December 16, 2024
Moreover, Circle’s partners, especially the Coinbase exchange, played a crucial role in the liberation of Tornado Cash. While the legal struggles of the protocol’s co-founders remain in the Netherlands, a precedent has been set in the United States.
In an industry where users misuse new technology, the Tornado Cash precedent and scholarly reviews from Stanford might help provide future guidance.
