The U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, sanctioned Tornado Cash in August 2022 after it reportedly processed over $500 million from several online hacks and heists. Mixing services like Tornado Cash blend cryptocurrency funds together to make their sources harder to trace — facilitating money laundering activities associated with stolen virtual currency funds

All current assets in Tornado Cash are frozen.

You cannot send or receive funds through Tornado Cash.

Though the technology for the mixer can not be completely shut down, its code is banned.

Some crytocurrency users are feeling that the Office of Foreign Assets Control is overstpping its authority by sanctioning a digital asset, rather than going after people or organizations. The September legal challenge against these sanctions was funded by Coinbase exchange and brought against the U.S. Treasury Department.

Investing in cryptocurrency can be a risky proposition, but mixers offer a way to mitigate some of that risk. Here’s what you need to know about cryptocurrency mixers and why the government is cracking down on them.

What is a crypto mixer?

Mixers, also known as tumblers or blenders, are used to make transactions on the blockchain more private by combining data from several transactions. Any one can’t trace where a certain asset is coming from because of this, making purchases completely anonymous.

Mixing services charge a fee, which is generally between 0.25% and 3% of the money transferred through the mixer. Mixers have made headlines for their use in money laundering and other cyber crimes, but they are legal if properly established.

One of the first decentralized apps on the Ethereum blockchain to provide private deals, Tornado Cash, has allegedly “combined” millions in stolen funds from numerous internet robberies. In 2019, one of the largest bank heists that moved money through the mixer was conducted by a Democratic People’s Republic of Korea state-sponsored hacking organization designated by the US Treasury.

According to a July 2022 report by blockchain analysis firm Chainalysis, mixer use is at an all-time high, with 23% of funds sent to mixers coming from addresses connected to illicit activity.

Sanctions are a critical part of modern international relations, but how do they work?

Enforcing economic sanctions is a powerful deterrent against activities that are prohibited by law. The recent sanction against Tornado Cash is based on a list of entities whose assets will be blocked and transactions with any associated actors will be prohibited.

OFAC has established standards for sanctions against virtual currencies. Anyone holding a prohibited cryptocurrency must notify OFAC within ten business days of the currency’s being banned and should not allow anybody else access to it (so no selling or trading). If you want to withdraw money, you’ll need permission from OFAC.

As of Aug. 8, 2022, U.S. users are no longer allowed to send any assets through the mixer — or retrieve any funds stuck on the platform — without special permission from the U.S Treasury,. Although, OFAC did note that it would look favorably on applications from users looking to withdraw their funds.

How have crypto issuers and platforms responded to the sanctions?

In compliance with the government sanction, Circle froze over $75,000 of assets — including a stablecoin tied to the U.S. dollar — on its platform.

Another U.S.-dollar-based stablecoin, Tether (USDT), issued a public statement saying that they would not be freezing all Tornado Cash accounts and would wait for an official, direct request from OFAC.

The lawsuit against the U.S. Treasury, claiming that they overstepped their authority by blocking the software instead of just individual actors, is being funded by Coinbase.

I don’t use Tornado Cash. Could this affect me?

While most users’ investments won’t be directly impacted by these sanctions, it does imply that other crypto platforms commonly used for money laundering could get shut down.

Mixers, for example, are an exciting new technology that allows you to create custom cryptocurrency assets with ease. However, decentralized finance applications such as mixers work more like the Wild West than Wall Street right now. They’re intended to operate without intermediaries, but because of a lack of internal regulation, they might be vulnerable to abuse and perhaps face government intervention or fines.

The high degree of volatility might imply that these incidents also have the potential to impact Ethereum as a whole. If the government instructed Ethereum validators to block blacklisted Ethereum addresses, for example, and a majority of them obeyed, it would effectively make Ethereum more regulated. So far, the government hasn’t issued this request, and if it did, it’s uncertain whether a majority of verifiers would comply.

How do I make sure my crypto assets aren’t affected by sanctions?

According to Katherine Dowling, chief compliance officer at Bitwise Asset Management, it is essential to invest in products from sources that are credible and up-to-date with regulations.

Although it may be appealing to use services that vow large profits or complete privacy, these type of programs come with a certain level of risk. When participating in cryptocurrency, which is already decentralized, it’s critical to only invest in products with no history of negative penalties. If someone were to violate OFAC sanctions, they could receive anything from a warning letter to severe financial repercussions or a criminal investigation.

Still, it’s nearly impossible to tell if a service will be used for criminal purposes. Also, complying with sanctions is often out of your hands: For example, the day after Tornado Cash was sanctioned, an anonymous user sent tiny transactions from the mixer to well-known Ethereum accounts–none of which were able stop the transfers.

OFAC says that it is avoidant of this practice known as dusting, and will not prioritize trying to regulate against those recipients. However, if you are a recipient, you should try to reject or block the transaction by filing a report with OFAC within 10 days counted as business days.

What does this mean for crypto?

If the government seizes control of all a cryptocurrency’s addresses and freezes associated assets, as happened when Tornado Cash was sanctioned, it could set a standard for future crackdowns.

“There will continue to be tension points between privacy and national security objectives,” Dowling adds. “However, we’ll need to develop better methods for detecting infractions.”

Until better solutions exist to control items like Tornado Cash, government safety procedures intended to combat unlawful behavior may harm innocent consumers of these goods as well.