U.S. authorities last year controversially banned citizens from using the “coin mixer” Tornado Cash. But Ethereum developers have been working hard on a solution they hope Feds will stay away from: Privacy Pools.
A demo to be released tomorrow of the new coin mixing app lets people send and receive Ethereum, the second-biggest cryptocurrency, anonymously. Though this time round, there’s a feature that proves the user is not a North Korean bad actor or some other type of criminal.
The U.S. Treasury Department sanctioned Tornado Cash in August because they said criminals—mainly North Korean state-sponsored hackers, Lazarus Group—were using it to launder dirty cash.
The Treasury Department’s move, which essentially banned Americans from interacting with the app, was criticized not only by many in the crypto world but also politicians like Rep Tom Emmer. “Privacy is normal,” he said at the time.
Tornado Cash’s team was also targeted: Dutch police arrested the app’s main developer Alexey Pertsev; he is set to remain in jail until an April hearing.
Now, Privacy Pools (which is currently just a demo and has not been audited) aims to pick up where Tornado Cash left off—but in a way that regulators and law enforcement will leave it alone.
I sincerely hope no one thought we were finished pic.twitter.com/YVpSMtjeCd
— ameen.eth (@ameensol) February 26, 2023
“It is not meant to be a final replacement product—it is meant to start a conversation,” the man behind the new app Ameen Soleimani told Decrypt.
Soleimani is widely credited as an early contributor to Tornado, though he says he did not contribute to the project’s code. Soleimani told Decrypt that he helped steer the project’s direction during its early days, besides contributing to Tornado’s initial funding through the developer’s MolochDAO
“The hope is that regulators are less interested in sanctioning [Privacy Pools], because it helps them accomplish their goals.”
Privacy Pools—a fork of Tornado Cash created by Soleimani and one other developer—works by allowing users to show publicly that their withdrawals are not linked to bad actors.
Users can still make anonymous transactions but there is the option to make it clear that the money being moved is not from something criminal—like a hack. The new app works just like Tornado Cash, but when users click the option to withdraw funds, they can generate a zero-knowledge proof which publicly shows they are not using a criminal blockchain address, but without revealing who they are.
Zero-knowledge proofs are used in cryptography to prove that something is known without revealing the known information directly.
One of the reasons the feds sanctioned the app last year was because hackers used Tornado Cash to launder funds from the massive attack on play-to-earn game Axie Affinity.
A coin mixer allows users to obfuscate the origin and destination of cryptocurrency movements by grouping various transactions together.
Authorities initially said that over $7 billion in illegal funds passed through Tornado since its creation in 2019—though blockchain data company Elliptic later said in a report that of the $7.6 billion that passed through the app, only $1.5 billion was dirty.
Coin mixers—which are used for a number of reasons—are just one of the things U.S. authorities are now paying attention to since launching a tough crackdown on the crypto world.
A number of U.S. lawmakers claim the fast-moving industry’s coins, tokens and apps are favored by criminals. And most politicians—even those who like crypto—are at the very least calling for clearer regulatory guidelines.
Many in the digital asset space are hoping that with regulation, they can still build and use tools that will protect their privacy.
“There is no guarantee that they [the authorities] won’t sanction [Privacy Pools],” added Ameen. “We live in a regulatory-by-enforcement regime.”
Editor's note: This article was updated after publication to clarify that the Privacy Pools demo is set to be released tomorrow, March 4.