PriFi Under Attack: New Developments in The Tornado Cash Case
More than one year ago, on 10 August 2022, the Dutch FIOD (Fiscal Information and Investigation Service) arrested Alexey Pertsev, one of the developers of Tornado Cash, after the crypto-mixer was sanctioned by the U.S. Treasury Department a short time before that.
Alexey spent nine months in jail and was released on April 26 2023, awaiting his trial for facilitating digital asset-based money laundering in March 2024. While this was great news earlier this year regarding this case, new developments followed one month ago, when two more Tornado Cash developers, Roman Storm and Roman Semenov, got into the crosshair of justice.
Tornado Cash Developers Charged by DOJ; Roman Storm Arrested
On August 23 2023, Roman Storm and Roman Semenov, who co-founded Tornado Cash with Alexey in 2019 were charged with operating Tornado Cash and laundering more than $1 Billion in criminal proceeds; on the same day Roman Storm was arrested in the state of Washington. Roman Semenov received a sanctions designation from the OFAC (Treasury’s Office of Foreign Assets Control and is believed to be located in Dubai.
“As alleged in the indictment, the defendants operated a $1 billion scheme designed to help other criminals launder and conceal funds using cryptocurrency, including by laundering hundreds of millions of dollars on behalf of a state-sponsored North Korean cybercrime group sanctioned by the U.S. government.” - Attorney General Merrick B. Garland
Luckily for Roman Storm, he did not have to spend as much time in jail as his co-founder Alexey Pertsev. He was released on bail just three days after his arrest by the FBI, on August 26 2023.
The question remains, if the legal grounds will hold for the prosecutors, as they charge developers for, well, developing software. The implications of the outcome of this case will be significant. Roman Storm himself pleaded ‘not guilty’ in the U.S. District Court for the Southern District of New York.
What is Tornado Cash?
Tornado Cash is one of the better known PriFi (private finance) solutions, decentralized and non-custodial, as it should be. In its essence, it is a cryptocurrency mixer, in this case for Ethereum (ETH).
It uses smart contracts and zK-proofs in order to facilitate ETH deposits before creating withdrawals to multiple other addresses which are made from the liquidity pools of this protocol. This way, the original sender remains anonymous.
A lot of people are using it to break the on-chain links that are created automatically, as ETH is pseudonymous but not anonymous. Wallets and their transactions are publicly visible and can be traced back from anyone, anytime.
Service providers like Chainalysis, which offers blockchain tracking for the private sector but also for government agencies like the IRS, can collect significant data and also discover the identity behind a pseudonymous wallet.
A fact that is still conveniently ignored by most users; also, Tornado Cash was not known among the majority of cryptocurrency holders.
More people finally took notice of its existence when the Office of Foreign Assets Control of the U.S. Department of the Treasury blacklisted Tornado Cash on August 8, 2022; since then, it is illegal for US citizens as well as residents to use the service.
Money Laundering With Cryptocurrencies vs. FIAT Cash
The main charge for the Tornado Cash developers is the one of ‘facilitating money laundering’, including the $1 Billion which were allegedly laundered by the Lazarus hacker group which is believed to be an operation of the North Korean government; while this might be true, not necessarily with knowledge of the accused developers, one has to say that the main money laundering operations rely not on cryptocurrencies, but rather FIAT money.
It is estimated that worldwide, criminals are laundering $800 Billion up to $2 Trillion, every year. On the other hand, cryptocurrencies reached ‘just’ $23.8 Billion back in 2022:
While the total amount of cryptocurrency laundered by year is increasing, 68% from 2021 - 2022, less than 1% of all cryptocurrency-activities can be tied to illicit purposes; it is also worth to note that money laundering via cryptocurrencies does not mean that solely decentralized non-KYC platforms like Tornado Cash were used. It is also possible to launder money via KYC-CEXs, using fake IDs and stolen identities to open accounts and use them for illicit purposes.
Governments & Regulators vs. Decentralization & Privacy Solutions
In the last few decades, technology has developed at breakneck speed, not least because of the new possibilities offered by the Internet which on the one hand offer advantages, but on the other hand also have disadvantages.
Not only for us, the ordinary citizens and users of the Internet and its applications, but also for governments and their authorities, who exploit them in order to gain more control over our everyday life, limiting privacy, an inalienable, fundamental human right, especially when it comes to our finances.
Governments and regulators are not about ‘regulation’ or seeking ‘justice’; it is about imposing fear on other developers, to protect the status quo. Decentralized privacy solutions are something that they do not want, as it doesn’t fit their agenda, which includes for example implementing CBDCs (Central Bank Digital Currencies) to gain even more control over us.
Conclusion: It is Time to Fight Back
Freedoms are not given; they are won. In order to maintain fundamental human rights, such as privacy, people have to come together and fight back; to develop new technologies, to focus on decentralization, in order to let people exercise their right of privacy.
“We must defend our own privacy if we expect to have any. We must come together and create systems which allow anonymous transactions to take place. […] We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.” - Eric Hughes, Cypherpunk’s Manifesto, 1993
I chose my side a while ago, working for Navcoin and having established the Private Finance Syndicate (PFS); have you chosen yours?