The U.S. sanctioning of a prominent cryptocurrency platform this week exposed technical gaps in the government’s ability to prevent criminals, national adversaries and extremist groups from using the services to launder money and finance their operations, analysts said.

Among the central challenges: Cryptocurrency platforms are increasingly run by computer code distributed across computers around the world, rather than by individuals facilitating transactions, analysts said.

The Treasury Department on Monday imposed sanctions against Tornado Cash, a popular cryptocurrency platform known as a mixer because it blends funds from different users and redistributes them, obscuring their origin. The Treasury Department accused Tornado Cash of laundering billions of dollars in virtual currency, including $455 million allegedly stolen by North Korean hackers. As part of the penalties, officials blocked all property held by the exchange under U.S. jurisdiction and barred U.S. companies and individuals from transacting with it.


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Analysts said the sanctions would hinder Tornado Cash’s growth by discouraging users and major cryptocurrency exchanges that are reluctant to trade on a blacklisted platform. This will reduce the amount of funds flowing in and out of Tornado Cash.

Circle Internet Financial Ltd., the issuer of a stablecoin that tracks the U.S. dollar, blocked the sanctioned wallet addresses after Monday’s announcement, effectively freezing the funds in those wallets.

“It is likely that nearly all responsible registered Virtual Asset Service Providers also took steps to block customers from transacting with these addresses, or face charges of willfully avoiding US sanctions compliance obligations,” Circle Chief Executive

Jeremy Allaire

wrote on Twitter.

The Treasury Department accuses Tornado Cash of laundering billions of dollars in virtual currency.



Photo:

Ting Shen for the Wall Street Journal

But almost as soon as the sanctions were announced, some users began trying to exploit perceived shortcomings in the government’s effort. For example, funds can still be transferred out of cryptocurrency wallets on the platform, and its software code, used to initiate transactions, can be reproduced and relaunched elsewhere.

“It is difficult, if not impossible, to shut down Tornado Cash entirely,” said

Tom Robinson,

co-founder of risk-management company Elliptic Enterprises Ltd., which analyzes illicit use of crypto services.

Tornado Cash’s developers designed the service to enable users to exchange cryptocurrency with little or no information about the parties, a contrast to traditional financial institutions that are typically required to collect details about their account holders. That appeals to users drawn to crypto for privacy and security—some Twitter users said this week they used Tornado Cash to send cash to support Ukrainians suffering from Russia’s invasion. But the lack of disclosure also creates opportunities for illicit transactions, Mr. Robinson said.

Tornado Cash’s code isn’t hosted by an individual or company, but lives on the Ethereum blockchain, a decentralized, global network of computers, where it automatically fulfills trades.

As a result, the U.S. and other governments have no individual or entity they can force to halt Tornado Cash’s operations. Even when

Microsoft Corp.’s

GitHub Inc. removed the latest copy of the platform’s code …….

Source: https://www.wsj.com/articles/tornado-cash-crackdown-shows-limits-of-regulating-cryptocurrency-services-11660220579

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