The US sanction against Tornado Cash has gone around the world and is now well known news. The sanction against the famous coin tumbler has been around for some time, and it was by no means a foregone conclusion when it happened due to its affiliations with rogue actors who stole billions of dollars from investors. However, as more information about the sanction emerges, it becomes increasingly clear that this may not be good news for sector investors.
The legal precedent
Now, many know that the penalty against Tornado Cash was imposed, but they don't know where from. The sanction came directly from the Office of Foreign Assets Control (OFAC), which has the task of sanctioning foreign countries and entities that the US government considers enemies of the state or great criminals. So just as transactions with a country or organization sanctioned by OFAC are illegal, so are transactions with Tornado Cash or any fund associated with it.
A certain number of portfolios, presumably belonging to Tornado Cash, were also sanctioned with the sanction. These wallets cumulatively contained more than $ 430 million and any transaction with any of these wallets is now punishable under US law.
The sanction is the result of funds stolen by South Korean hackers and attributable to Tornado Cash. Tornado Cash had become the service of choice for cleaning up illicit funds in the cryptocurrency space and putting them back into circulation without being traced to the hackers.
Circle, the entity behind USDC, has had to freeze the USDC held by some portfolios and cannot redeem these coins or risk being punished by US law.
Where does the Tornado Cash go?
There is a lot of speculation as to what a platform like Tornado could do with its coins now that the sanction has been imposed. One possible destination for coins are liquidity pools. Eventually, liquidity pool holders would end up with tainted USDCs that they can never redeem. This threatens decentralized trading structures, which rely on liquidity pools to facilitate trade between two or more parties.
Other possible consequences of this sanction would be on stablecoins such as DAI. Now, this stablecoin has the majority of its reserves in USDC, and with the government squeezing Circle, any action taken against USDC would have a direct impact on DAI, triggering fears of destabilization of another stablecoin. This would also have a profound effect on the cryptocurrency market as a whole, such as the collapse of the UST earlier in the year.
For US citizens, residents and corporations, the implications are even wider. This means that they cannot interact with Tornado in any way, be it working, downloading / running its software, or making donations to Gitcoin. This also extends to depositing and withdrawing funds from smart contracts, as well as just visiting the website.
