DEFIREGULATION

Tornado Cash co-founder arrested, U.S. Department of Justice: Indirectly aided North Korea in developing nuclear weapons

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Tornado Cash co-founder arrested, U.S. Department of Justice: Indirectly aided North Korea in developing nuclear weapons

I thought the regulatory and litigation issues surrounding Tornado Cash were coming to a close, but unexpectedly, the U.S. Department of Justice has filed a lawsuit against two of the protocol's founders. From the allegations, it appears that other DeFi protocols may also be affected.

Co-founder of Tornado Cash Arrested

According to an announcement from the U.S. Department of the Treasury, the Department of Justice has indicted two co-founders, Roman Semenov and Roman Storm, of Tornado Cash for allegedly providing money laundering services to the North Korean hacking group Lazarus Group.

Roman Semenov has been arrested by the FBI and the Internal Revenue Service Criminal Investigation, while Roman Storm remains at large.

Alexey Pertsev, a Tornado Cash developer previously arrested by the Financial Intelligence Unit of the Netherlands (FIOD), is described in the Department of Justice announcement as a third co-founder but has not been charged.

The charges against the two include:

  1. Conspiracy to commit money laundering

  2. Conspiracy to violate sanctions

  3. Conspiracy to operate an unlicensed money transmission business

Tornado Cash Accused of Indirectly Assisting North Korea's Development of Nuclear Weapons

The announcement cites past large-scale attacks in the crypto space, alleging that the Lazarus hacking group used Tornado Cash for money laundering purposes, with the funds being used to aid North Korea's development of missiles and nuclear weapons.

  1. March 2022 | Exploitation of the Axie Infinity sidechain Ronin vulnerability, resulting in a loss of 173,600 ETH and 25.5 million USDC

  2. August 2022 | Theft of approximately $100 million in the Harmony public chain's cross-chain bridge

  3. August 2022 | Decentralized robbery of $190 million in the cross-chain protocol Nomad

Deputy Secretary of the Treasury Wally Adeyemo stated that the founders of Tornado Cash never took any meaningful actions to mitigate illegal activities, despite knowing that the protocol was being used by the Lazarus group for money laundering.

U.S. Department of Justice: Disabling Services on the Front End Does Not Ensure Compliance

In April 2022, Tornado Cash became aware that Ethereum addresses related to the Lazarus group had been sanctioned by the U.S., and immediately announced compliance on the front end via Twitter.

However, the Department of Justice emphasized that both Roman Semenov and Roman Storm were well aware that users familiar with the contract code could easily bypass front-end sanctions and directly use Tornado Cash through smart contracts, yet they consistently ignored the fact that the protocol was being used by North Korean criminal groups for money laundering.

The announcement also mentioned that the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department will host a FinCEN Exchange focusing on combating North Korea's abuse of the digital asset ecosystem.

Review of Regulatory Events Involving Tornado Cash Mixing Protocol

Starting in August 2022, Tornado Cash faced a series of regulatory events that sparked significant controversy in the crypto space:

  • August 8: Tornado.cash added to the U.S. Office of Foreign Assets Control (OFAC) sanctions list

  • August 9: Tornado.cash founder's GitHub account suspended

  • August 12: Developer Alexey Pertsev arrested

  • August 20: Mining pools and protocols began cooperating with reviews, halting the processing of related transactions

  • September 14: Response from the U.S. Treasury Department, agreeing to consider individual transactions, allowing users not involved in sanctionable activities to apply for the release of frozen funds

  • April 2023: After eight months, Tornado Cash developers reportedly released from custody, placed under house arrest, TORN price surged over 30%

  • August 2023: Supporters of Tornado Cash appeal unsuccessful, U.S. judge rules that the Treasury Department's sanctions were not overreaching