In the recent happenings in the crypto space, the U.S. Government has cracked down on Tornado Cash co-founders for crypto violations.

News in a nutshell

Government officials have initiated a crackdown on the co-founders of Tornado Cash, a virtual currency mixer, shortly after a federal judge ruled in favor of government sanctions. Russian national Roman Semenov, a co-founder, was sanctioned by the Treasury’s Office of Foreign Assets Control for alleged involvement with North Korean hacking group Lazarus, among other offenses.

In a related development, the Justice Department unveiled an accusation against Semenov and co-founder Roman Storm, charging them with money laundering conspiracy and running an unlicensed money-transmitting business. Storm was apprehended by federal authorities in Washington.

Like other mixing services, Tornado Cash blends different digital assets, potentially including illegally obtained funds, to obscure their origin. Accused of laundering billions in crypto since its inception in 2019, Tornado Cash allegedly facilitated over $1 billion in money-laundering transactions, including funds for Lazarus Group.

Treasury claims Tornado Cash was involved in laundering more than $96 million from thefts, including blockchain bridge and crypto firm heists.

The arrests follow U.S. District Judge Robert Pitman’s ruling that the Treasury acted within its authority to sanction Tornado Cash. Despite industry pushback, including concerns about limiting privacy software for Americans, the government’s actions signify a firm stance against cryptocurrency misuse.

With so much happening with Tornado Cash, let’s briefly overview what it is and how it works.

Understanding Tornado Cash

Tornado Cash is an Ethereum-based decentralized and non-custodial solution for privacy and anonymity. The anonymity of transactions is increased by severing the on-chain connection between coin senders and recipients.

Ethereum serves as a framework for decentralized protocols like Tornado Cash (TORN), which allows for anonymous token transfers. The Zcash privacy currency technology has contributed to the success of this token-mixing platform. Tornado Cash uses Ethereum’s ERC-20 standard for transactions.

As a result, you may ask for coins to be sent to Tornado Cash and get money in your wallet in return. Since Ethereum is a public blockchain, this approach guarantees that your financial privacy is protected.

Tornado Cash leverages smart contracts to ensure anonymity by allowing token withdrawals from one address while accepting token deposits from another. These smart contracts function as pools that combine all assets that have been deposited.

When money is taken out of such pools by a brand-new address, the on-chain link between the source and the destination is severed. As a result, the removed crypto-assets are anonymous.

A closer look at the working of Tornado Cash

As you might expect, Tornado Cash is related to private cryptocurrencies like Monero (XMR) and Zcash (ZEC). However, these privacy coins are private because they use zero-knowledge proof, a crucial component of cryptography.

ZKP, or Zero-Knowledge Proof, is the most secure kind of authentication that may be used.

Why? Since it doesn’t need the sharing of passwords. As a result, passwords cannot be compromised. In other words, ZKP enables users to authenticate themselves without disclosing their sensitive information.

The protocol is known as Zero-Knowledge Proof since the authentication doesn’t ask to reveal any secrets.

The so-called Yao’s Millionaires’ problem is one of the most well-known examples used to illustrate ZKP. If two millionaires want to compare their financial situations without divulging their individual sums of money, they will use ZKP.

Any circumstance requiring proof of identification without knowledge follows the same general rule.

Image Source: BBVA

After the ZKP explanation, it is simple to comprehend how Tornado Cash functions. First, Tornado Cash generates a random key to deposit your ERC-20 crypto money, just like Alice (verifier) gives Bob (prover) an unexpected route back to prove his identity.

Tornado Cash breaks the on-chain connection between wallets by using this random key generation between the sender and the recipient. Technically, Zcash and Tornado Cash use a ZKP variant known as zk-SNARK proofs (short for the zero-knowledge succinct non-interactive argument of knowledge).

Pros and Cons of Tornado Cash

PROS

• Tornado Cash is a cryptocurrency “mixer,” or service that gathers coins and distributes them to new addresses. Unquestionably, this system’s ERC-20 interoperability is one of its key advantages.

• On websites like CoinMarketCap, we can locate the system’s token, which is typically a technique to get more market traction.

• Users who support the project’s privacy functions are rewarded with liquidity through the anonymity mining feature. This feature seems to enhance the anonymization of transactions through Tornado Cash permanently.

• Lastly, Tornado Cash provides a relatively straightforward set of tools for investors concerned about privacy. If you want to reach a huge market, user-friendliness is a crucial business component.

CONS

• Since mixers have been around long, they don’t affect the game. Even if you utilize one, remember it will make a lasting impression on your address.

• Anyone can tell whether you use a mixer on your wallet by just browsing Etherscan. Evaluate if you are willing to take this risk.

• Authorities may contact you about the situation as crypto law becomes more stringent. Regulators could query your use of a mixing service in the past. Those who decide to participate in illegal activities must accept the repercussions of their choices.

• Among its drawbacks is the potential for a hacker to abuse the system. If lawmakers opt to tighten crypto regulations, Tornado Cash and similar alternatives will undoubtedly be at the center of the regulator’s evaluations.

• Last, seasoned Tornado Cash users frequently criticize the absence of anonymity features.

Bottom line

Tornado Cash might be a godsend for some people who cherish their privacy. However, some users may occasionally find the anonymity offered by the service less than desirable. A service that helps customers maintain their identity and privacy is what Tornado Cash is. While doing so, it seeks to guarantee freedom from interference by outside authorities. The above section suggests the advantages and disadvantages of this decentralized cryptography system. Always have an open mind before you take any step, and DYOR.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.