Published Aug 15, 2022
By Qredo Team

Tornado Cash: Navigating sanctions with Qredo

The US Treasury recently unveiled one of its largest actions against the crypto industry to date by sanctioning addresses linked to the mixing service Tornado Cash.

The move, which comes on the back of similar action against another crypto mixing platform Blender in May, prohibits all US persons (both those in the country and citizens abroad) from sending or receiving funds from Tornado Cash.

The authorities said they made the decision to sanction the platform based on its alleged involvement in laundering more than $7 billion worth of virtual currency since its creation in 2019, including over $455 million stolen by the Democratic People’s Republic of Korea-backed Lazarus Group.

The announcement prompted a flurry of activity across the crypto ecosystem, with many firms and individuals exposed to the sanctions.

However, the saga has taken another twist following the announcement after a Tornado Cash address began sending small amounts of Ether to accounts linked to celebrities and other well-known US individuals.

The incident raises questions about how to deal with sanctions in the digital asset sector and how individuals and Virtual Asset Service Providers (VASPs) in particular can protect themselves from inadvertently interacting with sanctioned entities.

Coming on the heels of wider adoption of the FATF Travel Rule by regulators governing the market, the action against Tornado Cash perfectly demonstrates the need for VASPs and others to protect themselves from unwittingly becoming tied up in illegal activity.

With Qredo’s Travel Rule Solution, those concerns are much easier to manage. Let’s take a look at why it matters and how Qredo can help you navigate the maze of crypto compliance.

Know your counterparty

Here is how the US Treasury’s Office of Foreign Asset Control (OFAC) described the decision to sanction addresses linked to Tornado Cash:

“As a result of today’s action, all property and interests in property of the entity above, Tornado Cash, that is in the United States or in the possession or control of U.S. persons is blocked and must be reported to OFAC.”

“In addition, any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt.

What that means is that any US persons, including companies and individuals, with Ether addresses which interact with a sanctioned Tornado Wallet are technically in breach of the sanctions.

So what then for celebrities including comedian Dave Chapelle, TV host Jimmy Fallon, and even Coinbase CEO Brian Armstrong whose accounts have received Ether from a Tornado Cash address following the Treasury announcement?

Are they now in breach of sanctions for receiving an unsolicited transaction from a wallet that remains functional on the blockchain?

The full list of transactions from the wallet can be found here: Users ultimately have limited control over who sends them funds through a blockchain such as Ethereum, but at Qredo we have implemented a Travel Rule Solution which helps protect institutions and individuals from inadvertently becoming entangled with undesirable entities.

How Qredo fixes this

With our bespoke Travel Rule Solution, wallet owners can sleep easy knowing that they are protected against receiving toxic assets.

The Travel Rule requires all Virtual Asset Service Providers (VASPs) to share identifying information — including names, physical addresses, and national ID numbers — for the originators and beneficiaries of digital asset transfers.

Using the Qredo Travel Rule Solution quarantine functionality, users can be confident that transactions can be paused, approved or rejected based on a data trigger or human interaction, ensuring VASPs are never exposed to assets tainted by illicit activity.

This means you have full control of what is coming into your wallet and your assets are protected against the risk of being connected to a sanctioned party without your permission.

“As the regulatory landscape continues to shift, digital asset businesses will need flexible compliance solutions to accommodate changing obligations. Qredo's unique model of decentralized multi-party computation provides the futureproof foundation to enable the architects of the new digital economy to comply with the Travel Rule — and  quickly adapt to new regulatory requirements."

– Ben Whitby, VP Strategic Partnerships and Regulatory Affairs, Qredo Twitter  |  LinkedIn