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In a move that raised the eyebrows of crypto privacy wonks, coin mixer Tornado Cash said Friday it is using a tool developed by compliance firm Chainalysis to block crypto wallets sanctioned by the U.S. Office of Foreign Assets Control (OFAC).
However, the blockade only applies to the user-facing decentralized application (dapp), not the underlying smart contract, one of the protocol's founders later tweeted.
The protocol's founder has previously said it is "technically impossible" to enforce sanctions on decentralized protocols like Tornado Cash. "There's not much we can do," he said in a March interview.
The half-measure of restricting front-end access is not new, however.
A former U.S. Drug Enforcement Agency agent told CoinDesk in January that Tornado Cash complies with OFAC's list of sanctioned crypto wallets. The announcement Friday follows Thursday's news that North Korean hackers were alleged by U.S. authorities to be behind the $625 million exploit of Axie Infinity's Ronin blockchain.
The Ronin hackers "have so far sent $80.3 million worth of ETH through Tornado Cash," tracing firm Elliptic wrote Thursday.
Tornado Cash uses @chainalysis oracle contract to block OFAC sanctioned addresses from accessing the dapp.
Maintaining financial privacy is essential to preserving our freedom, however, it should not come at the cost of non-compliance.https://t.co/tzZe7bVjZt
— 🌪️ Tornado.cash 🌪️ (@TornadoCash) April 15, 2022
"The fact that Tornado Cash doesn't allow access to its app to comply with regulations doesn't necessarily mean that the protocol and smart contracts are not available to the sanctioned entities," Tal Be'ery, the chief technology officer of crypto wallet ZenGo, told CoinDesk in a direct message.
OFAC is a U.S. government body responsible for enforcing economic sanctions to support national security and foreign policy. It maintains a list of crypto wallets tied to sanctioned individuals and entities.
The Chainalysis oracle for sanctions compliance is a free smart contract that scans for crypto wallets that are sanctioned by various governments. The sanctions-screening tool was launched in March against the backdrop of Russia's invasion of Ukraine.
"Now is the time for the industry to demonstrate that blockchains' inherent transparency make cryptocurrency a powerful deterrent to sanctions evasion," Chainalysis CEO Michael Gronager said at the time, adding:
"In anticipation of ongoing sanctions, we've prioritized the development of these tools so that all cryptocurrency market participants have what they need to harness this transparency and conduct basic sanctions screening at no cost to them."