The founder of Tornado Cash was arrested for the "original sin" of privacy trading tools?

introduction

Western religions believe that the so-called "Original Sin" refers to the fact that Adam and Eve, the ancestors of mankind, were tempted by a snake, disobeyed God's order, and ate the forbidden fruit of the Garden of Eden. The inherent original sin is the root of all human evils and disasters. Later, the concept of "original sin" was widely used to describe some things that did more harm than good at the beginning and were not allowed by the rules. In recent years, as regulators have gradually deepened their understanding of blockchain and its derivative technologies, and Regulatory measures have become increasingly stringent, and some blockchain-derived technologies have been banned and cracked down. Among them, many private transaction tools represented by Tornado Cash have become the hardest hit areas of technological crimes in recent years. **

Today, Sister Sa's team will talk with you in detail about the "original sin" of privacy trading tools (or "coin mixers").

01 Brief introduction of privacy trading tools—Take Tornado Cash as an example

**(1) Why do we need private transactions? **

Before explaining what a privacy trading tool is, we first need to understand why we need it and the background of its birth. The many public chains represented by Ethereum are the blockchains with the richest types of virtual assets, the most active transactions, and the most widely used blockchains in the world today. As long as they can access the Internet, anyone can access the public chains and complete transactions on the chains. For virtual asset transactions, the transaction can be effectively confirmed and permanently and publicly recorded on the chain, and no one can tamper with it. In short, a completely decentralized public chain is open source: the operation of the entire system is open and transparent, but this open source also leads to the default disclosure of all data on the chain. Although the public chain allows participants to hide their true identities through the public key of the virtual asset wallet, the virtual assets held by each wallet address and the transaction process of each virtual asset will be recorded and made public by the public chain.

This has led to a problem for public chain users: **It is difficult to maintain transaction privacy on the public chain. **Even though public chain users can guarantee the privacy of virtual asset transactions to a certain extent by using multiple wallet addresses for transactions, if they use data analysis tools on the chain for transaction analysis, or even just pay enough attention to observe, they can Through the flow trajectories between specific virtual assets, specific associations between different wallet addresses are discovered, thereby exposing the true ownership of these addresses.

Therefore, we need a reliable privacy transaction tool to deal with the risk that the public key address may be revealed during frequent transactions.

**(2) What is Tornado Cash? **

A virtual currency mixer born as a privacy trading tool. In order to solve the privacy and security of public chain virtual asset transactions, a virtual currency mixer was invented. In fact, the working principle of the virtual currency mixer is very simple. Taking Tornato Cash as an example, many users who need private transactions need to transfer their cryptocurrencies to Tornato Cash first. At this time, Tornato Cash will The virtual assets transferred by the user are accounted for and a random key is issued (the key is not only the proof that the user sends the virtual currency to Tornato Cash, but also the proof of its future withdrawal), and the sources are different (represented by ERC20 Coin-based) a large number of virtual currencies are precipitated and collected into a fund pool, and Tornato Cash will stir and mix virtual currencies from different sources, and users can then use the key to withdraw from the large fund pool (after deducting service fees) Withdrawing the equivalent virtual currency assets successfully achieves the purpose of confusing the source of funds and the original owner. As long as there are enough users and the fund pool is large enough, this method of withdrawing funds at random intervals will make it very difficult to track the deposited funds.

Tornato Cash is the most representative smart contract mixer. Based on the advantages of the above two privacy trading tools, Tornato Cash goes a step further and creates an automatic, efficient and neutral currency mixing tool that does not require an operating entity through smart contract technology. Compared with the traditional old currency mixer, the smart contract mixer has the advantages of being less traceable and more efficient. Unlike the previous generation of traditional coin mixers CoinJoins, Tornato Cash, a smart contract-based coin mixer, does not combine and mix multiple users' funds in one transaction. Instead, the user's funds are sent to a large pool of funds and mixed with multiple other addresses that are not related to the user. After the user sends the funds to the smart contract mixer, he will receive a certificate of deposit, which can be used for two main purposes: (1) to prove that the holder is the depositor; (2) at any time and place The voucher will withdraw the virtual currency to the specified wallet address.

The smart contract mixer usually cooperates with some cross-chain payment services based on the Ethereum platform called "relayer". In simple terms, these cross-chain payment service providers can provide users with payment mixer withdrawal transactions The ether required for the gas fee. In this way, users can withdraw funds to new wallet addresses without leaving any transaction records, further hiding the flow of funds.

02 **The founder of Tornado Cash was arrested. What kind of "original sin" exists in privacy trading tools? **

On August 24, 2023,** The U.S. Department of Justice formally charged Tornado Cash founders Roman Storm and Roman Semenov with violating money laundering and sanctions regulations and conspiring to operate an unlicensed money transfer business. **

In the indictment, firstly, the prosecution believes that the defendant is suspected of creating, operating and promoting Tornado Cash, a privacy trading tool, and facilitated more than $1 billion in money laundering transactions; secondly, the prosecution believes that Tornado Cash is the sanctioned North Korean cybercrime organization Lazarus Group ( Sister Sa’s team reminded: Regarding the identification of the nature of Lazarus Group, this information has not been verified by multiple parties, and it is only identified by the United States and other countries) to launder hundreds of millions of dollars. At present, Roman Storm has been arrested in Washington State and appeared in court in the US District Court for the Western District of Washington, while another defendant, Roman Semenov, is still at large.

The prosecution believes that, as the founders, technology developers and ultimate beneficiaries of Tornado Cash, Roman Storm and Roman Semenov implemented untraceable and anonymous financial transaction services to advertise to customers, which violated the relevant US anti-money laundering laws KYC policy or anti-money laundering procedures, which also violates US sanctions against Tornado Cash (at the end of 2022, the Office of Foreign Assets Control of the US Department of the Treasury announced financial sanctions against Tornado Cash, a virtual currency privacy trading tool) and criminal groups such as Lazarus Group measure. As a result, the duo have been charged with one count of conspiracy to commit money laundering and one count of conspiracy to violate the International Economic Emergency Powers Act; jointly charged with one count of conspiracy to operate an unlicensed money transmission business , if they are all punished by the maximum penalty, they can be sentenced to fixed-term imprisonment of more than 20 years. **

03 **Is it feasible to develop privacy trading tools in China? **

Aside from technical issues, Sister Sa's team reminds that any organization or individual should not develop a private transaction tool similar to Tornado Cash in China, nor provide virtual asset private transaction services to residents in my country in any form. In our country, this behavior may be involved in several crimes.

(1) Crime of illegal business operation

On September 24, 2021, ten ministries and commissions jointly issued the "Notice on Further Preventing and Dealing with the Risk of Hype in Virtual Currency Transactions" (hereinafter referred to as the "9.24 Notice"). Virtual currency-related business activities, such as exchange business between exchanges, buying and selling virtual currency as a central counterparty, providing information intermediary and pricing services for virtual currency transactions, token issuance financing, and virtual currency derivatives transactions, are suspected of illegally selling tokens and coupons, and making public disclosures without authorization. Illegal financial activities such as issuing securities, illegally operating futures business, and illegal fund-raising are strictly prohibited and resolutely banned in accordance with the law. Those who carry out relevant illegal financial activities that constitute crimes shall be investigated for criminal responsibility in accordance with the law. Moreover, the provision of services by overseas virtual currency exchanges to residents in my country through the Internet is also an illegal financial activity.

It can be seen that, as a service that facilitates virtual asset transactions, **privacy trading tools are themselves one of the businesses that are explicitly prohibited by the 9.24 Notice of my country. ** According to the third paragraph of Article 225 of my country's "Criminal Law", illegally operating securities, futures, and insurance businesses without the approval of the relevant state authorities, or illegally engaging in fund payment and settlement business, constitutes an illegal operation crime.

(2) Crime of Money Laundering/Crime of Aiding Information Network Criminal Activities

If privacy trading tools are widely used in money laundering by upstream crimes (such as telecommunication fraud, gang-related, drug trafficking and other eight crimes stipulated in my country’s Criminal Law), then developers and service providers of privacy trading tools are likely to constitute accomplices in money laundering crimes or assisting information cybercriminal activities.

Since private transactions can easily conceal the source and whereabouts of funds, in practice, in addition to being widely used by ordinary users as a small tool to ensure their own transaction security and transaction secrecy, they also have the potential to be developed by criminal gangs as a special money laundering tool.

From Tornado Cash being sanctioned, it can be found that among the active users on privacy trading tools, ordinary users account for the vast majority; and in the transaction records, the vast majority of transactions are also initiated by ordinary users to protect transaction privacy legal transaction. However, if we look at the transaction volume, we can find that illegal and criminal funds account for a very large part of the transaction amount of Tornado Cash, which shows that criminals use this tool to launder money rampantly. Therefore, once the tool is used by criminals as a money laundering tool, the developer of the privacy trading tool is likely to constitute an accomplice to the crime of money laundering or a crime of assisting information network crimes. **Sister Sa's team reminds that in China's judicial practice, it is basically impossible to defend similar cases with the automatic execution of technology-neutral smart contracts.

04 Written at the end

Sister Sa's team always believes that the theory of technology neutrality has great guiding significance for legislation, judiciary and law enforcement, but privacy trading tools (especially smart contract privacy trading tools like Tornado Cash) are like a Pandora's box. From a regulatory point of view, as long as it is released, it is almost a technological product that will inevitably affect financial security and promote criminal activities, and it will be pursued fiercely in any country. Also based on this, Sister Sa's team believes that if there is no good supervision and functional restrictions on privacy trading tools, then it is an untouchable "red line" in the current regulatory environment. In addition, blockchain technology development Practitioners in the privacy circuit in China must also pay attention to this issue, and must not cause criminal risks to themselves due to technology development and application.