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Why Proof of Innocence Won’t Work for US Tornado Cash Users

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“Anyone considering interacting with the Tornado Cash wallets should first call a lawyer, and be prepared to hear no,” a partner at law firm Morrison Cohen said

Web3 venture builder Chainway recently announced a tool that would interest Tornado Cash users — a tool that would provide data supposedly showing their funds are from a legitimate source. 

At issue is that Tornado Cash — at least for US persons — is, for now, off limits.

The US Treasury’s Office of Foreign Assets Control sanctioned the crypto mixing service in August, accusing it of allowing users to launder billions of dollars in stolen cryptocurrencies, including $445 million by North Korean hacking group Lazarus.

In September, the Treasury said Tornado Cash’s website had been deleted from the internet but that it could be found on some internet archives. It is also indefinitely available on decentralized storage network IPFS.

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“While engaging in any transaction with Tornado Cash or its blocked property or interests in property is prohibited for U.S. persons, interacting with open-source code itself, in a way that does not involve a prohibited transaction with Tornado Cash, is not prohibited,” the agency says in its list of frequently asked questions. 

The move sparked much debate, raising questions about instances where people may want to use Tornado Cash for legitimate reasons such as donations. Ethereum creator Vitalik Buterin himself revealed that he donated funds to Ukraine through the service. 

Still, “proof of innocence” as a concept may not hold any water, because — regardless of whether it works as intended — Tornado Cash is a sanctioned entity.

Proof of innocence goals and pitfalls

Chainway says Tornado Cash users may want to show that their use of the mixing service is unrelated to any illicit activity. Its tool allows users to show that their funds don’t come from specified deposits and allows them to “clear their name and demonstrate their innocence without revealing their identity.” 

However, even if the tool prevents law-abiding citizens from inadvertently mixing cryptoassets with illicit actors, many legal experts believe it won’t resolve the main issue for US persons.

To the extent such conduct is “willful,” US persons using the proof of innocence tool with Tornado Cash may expose themselves to criminal prosecution, Anand Sithian, counsel at Crowell & Moring, told Blockworks.

Richard Mico, chief legal officer at Banxa, agrees that it’s highly unlikely that a tool like proof of innocence would mollify the US Treasury.

“I doubt that this proof of innocence technology has any legs in terms of making Tornado Cash legally viable or regularly used in any way, shape or form in the short to medium term,” Mico said.

License for use unlikely

Only those who initiated transactions with the service prior to Aug. 8, 2022 (the date of the ban) may apply for a specific license to engage with the service to extricate funds. 

“I think a general license to deal with Tornado Cash, even using a proof of innocence protocol, is unlikely to be granted considering that the US government has made crypto-related enforcement matters a top priority in light of the recent bankruptcies of FTX and others,” said Jeffrey Blocking, general counsel at Quadrata.

Ask a lawyer first, but expect ‘no’

Jason Gottlieb, partner and chair of Morrison Cohen’s digital assets and white collar and regulatory enforcement groups, found the proof of innocence concept an interesting one, and he hopes that regulatory bodies can eventually adopt ways to allow users to control their own assets and protect their privacy while being full compliant.

“For the moment, however, interacting with sanctioned wallets, even in the name of trying out a new technology, could carry heavy penalties. Anyone considering interacting with the Tornado Cash wallets should first call a lawyer, and be prepared to hear ‘no,’” he said.CRYPTOCASTER® - DECENTRALIZED FREEDOM!
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