Tornado Cash banned from Ethereum: U.S. sanctions apply at a protocol level

Tornado Cash

A decentralized, open, free internet may now be in danger. This is not clickbait, FUD, or exaggeration. The biggest Ethereum mining pool, Ethermine, no longer generates blocks with Tornado Cash transactions in them. This is an instance of protocol-level filtering and is probably brought on by OFAC penalties.

Takens Theorem, a cryptocurrency expert, found that Ethermine no longer processes Tornado Cash transactions and provided the chart below. CryptoSlate examined on-chain data and verified that, throughout the time period shown below, Ethermine had not generated a block containing a Tornado Cash transaction.

The usage of Tornado Cash has just received U.S. approval via OFAC, making it forbidden for any U.S. business to connect with the protocol.

Following this punishment, Circle “blacklisted” USDC on the Ethereum network, preventing any holders who had dealt with Tornado Cash from doing so again. This action effectively stopped all $USDC from passing via Tornado Cash.

Then, DeFi protocols like Aave, Uniswap, Balancer, and others added an API from TRM Labs that disabled the front end of their dApps and basically banned addresses included on OFAC’s list.

According to reports, Aave gave access back to wallets that had been “dusted” with 0.1 ETH by a hacktivist in an effort to draw attention to one of the major problems with following the penalties. Any address that dealt with Tornado Cash, according to OFAC, was now subject to American sanctions.

Although it is debatably excellent that Aave has given those well-known individuals who were targeted access again, the concern of “what will happen to users who are targeted by such an assault in the future” still remains.

Questions about what happens when you pay someone 0.3ETH using Tornado Cash need to be answered. Do they get banned from Aave ? Beyond all the aforementioned, Ethermine’s decision to cease creating blocks that include Tornado Cash transactions is a significant development. Processing transactions in a certain order goes against the Ethereum blockchain’s fundamental tenets. The network is meant to be inclusive, open-source, free, and decentralized.

Even while there are still other miners processing the transactions right now, if more follow Ethermine’s example, there may come a day when no one will process transactions for Tornado Cash.

After The Merge, Vitalik Buterin was not amused by the idea that validators would abide by OFAC requirements and vowed that any validators who did so should have their ETH staked burnt. He agreed such acts should be seen as “an assault on Ethereum and burn their stake through social consensus” if they do not include Tornado Cash transactions. We now see a real-world instance of proof-of-work validators disregarding Tornado Cash blocks.

Since Ethermine is headquartered outside the United States, it is not subject to the OFAC penalties. However, the Ethermine pool’s users can be American citizens. It can be seen as dealing with Tornado Cash if Ethermine mines a block that contains a Tornado Cash transaction, violating the restrictions.

So, does this matter?

Matt Huang, co-founder of Paradigm, recently reemphasized how crucial it is for the blockchain ecosystem to “fight censorship” and stay impartial.

Harsh Rajat, the creator of the Ethereum Push Notification Service, expressed similar worries. 

“Banning open source technology via regulations is akin to suing Ford for creating the automobile. It is disappointing to see worthy initiatives being compelled to follow rules out of fear of being targeted or because of the way the regulations are drafted. Even more terrible, though, is the manner that someone had a knee-jerk response and enacted rules that are inapplicable to web 3.”

Block inclusion and exclusion decisions should not be made by any business operating within the Ethereum ecosystem. The news is shocking, yet there is not yet a catastrophe. Other mining pools don’t seem to be following Ethermine’s example, and Ethereum validators like Coinbase have firmly declared they won’t filter transactions after The Merge.

However, it’s risky to drive down this route. This is a number of steps backward and may lead to an even darker future; it is not the way toward a free and equitable decentralized internet.

The Tornado Cash code is entirely open-sourced. When firearms are used to harm innocent people, we do not jail the gun makers. When a criminal uses currency for an illicit transaction, the government is not to blame. The Tornado Cash team’s code is not held accountable for individuals who use the protocol to launder money according to the same justifications. There is a need for developers to invest in new anti-money laundering tools that will address the current environment. 

Tornado Cash is a tool for anonymity at its heart. The challenge is ensuring money does end up with people with the wrong ideas. Overcoming this challenge will go a long way towards narrowing the gap between the authorities and emerging technology companies. Tornado Cash is bound to remain under the radar for some time.  

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