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Tornado Cash Sanctions Side Effects, Justin Sun funds frozen by Aave, and could this happen to you?

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Tornado Cash Santion Fall-out

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Justin Sun New Flash:

  • Ethereum based defi protocol Aave is reported to have banned Justin Sun, as in freezing his Aave account, and denying him access to those fund, as a result of that account interacting with Tornado cash.

TRON Founder Justin Sun Tweeted that he is now blocked or unable to access his account on Aave after receiving a random gift of 0.1 Ethereum From Tornado Cash.

Justine Sun Tweet: I’m officially blocked by @AaveAave since someone sent 0.1 eth randomly from @TornadoCash to me.

Twitter Link: @StaniKulechov pic.twitter.com/tNXNLNYZha H.E. Justin Sun🌞🇬🇩 (@justinsuntron) August 13, 2022

Source

  • Several Ethereum based entities have developed a common method of banning accounts doing business with Tornado cash, which means any interaction with the protocol involving ethereum sent to or received from the protocol. Those accounts on these ethereum based defi projects will be frozen. These business currently include Aave, Uniswap, and Balancer.

  • Note: I have not independently confirmed this transaction, nor authenticated this Tweet is truthful.

  • But other reliable cryptophiles have published lists of these random gifts and his account is on those lists.

  • Those lists report to confirm over 100 so called "Anonymous Gifts of Ethereum".

  • Reportedly, the list of transactions has been verified on the Ethereum Blockchain Explorer, as being from Tornado Cash to those celebrities Public Ethereum Wallet addresses, including Justin Sun.

  • Others cryptophiles have reported that Aave has confirmed that it is freezing accounts with any interaction with Tornado Cash.

  • Aave confirmed trhey are freezing accounts which interact with Tornado Cash.

  • Aave confirmed that any transactions from Tornado Cash to any users account are considered interactions with Tornanado Cash.

  • So I and others are interpreting Aave's statements as confirmation that "Anonymous Gifts of Etherem" from Tornado Cash, which are technically transactions between a banned project Tornado Cash and user accounts like their Ethereum wallet are interactions, and results in those users accounts on Aave being frozen.

  • Lets be clear, you don't have to be a criminal attacking bridges and using Tornado Cash to launder the funds.

  • You can be a randomly selected person, whose public wallet address for your ethereum wallet or Bitcoin wallet is Publically known, for various reasons, like because you receive funds there for legal and legitimate activities, and a random person decides to send you ethereum through Tornado cash to keep their identity anonymous, and your Aave account and possibly any accounts you have in a US Registered Bank, US registered Money Lender, US registered Money Transmitter or US registered Money Processor could be locked

Background:

The Ban

Tornado Cash was added to the Foreign Assets Control (OFAC) Specially Designated Nationals And Blocked Person List (SDN). A mechanism used to punish terrorists, and other dangerous individuals, not tools or technologies, as stated by Jerry Brito, Executive Director at Coin Center. source

  • All US citizens and US registered financial entities were recently forbidden to interact with Tornado Cash by the US Government Treasury Department.
  • Several Ethereum based defi projects have developed a common approach to banning or freezing the Ethereum in individual projects accounts on those projects, which interact with Tornado Cash: i.e. receive ethereum from Tornado cash these include Aave, Uniswap, Balancer and others.

Tornado Cash
  • Tornado cash is a smart contract or application which obscures the origin of cryptocurrency tokens. Tornado Cash is used by people to make anonymous transactions.
  • Anonymous transactions are not just for criminals. However, some criminals use TornadoCash to launder or obscure the origins of stolen money.
  • The US Treasury Department placed sanctions on TornadoCash, and these sanctions require any US registered bank, money processor or money transmitter to freeze accounts which are caught interacting with Tornado Cash.
  • Aave maynot be required to do this, as it isn't a bank, or registered money processor or registered money transmitter.
Aave
  • AAve is a defi lending protocol that allows users to lend or borrow cryptocurrencies.
  • Aave investors deposit funds in liquidity pairs or liquidity pools similar to Cubfinance or Polycub, which were created by Leofinance of Hive. Investors earn money on the trading or borrowing of other investors.
  • Aave announced they are banning users who interact with Tornado cash.
  • These other projects announced bans on users interacting with Tornado Cash: Aave, Balancer, Uniswap.

The Tornado Cash Problem

  • The Aave project is similar to other DeFi projects, however, this one isn't completely decentralized, and it has a central entity which has decided to freeze the accounts of investors who do business with Tornado Cash.
  • But be clear that when I say do business with Tornado Cash, I mean any interaction with the smart contract protocol, including receivng "Gifts or Unsolicited cryptocurrency Tokens from Tornado cash.

The Anonymous Gift Problem

  • The problem is that a complete stranger can send funds to Tornado Cash and then withdrawl them to your public wallet address, and that is considered interacting with Tornado Cash.
  • And that violates the current ban, which requires US Registered Banks, US registered Money Lenders, US registered Money Transmitters or US registered Money Processors to freeze your account and prevent you from accessing any funds in your accounts.
  • Note that this effects funds or cryptocurrency which is not on Tornado Cash, but which are controlled by these entities; US Registered Banks, US registered Money Lenders, US registered Money Transmitters or US registered Money Processors.

The Trolling Problem:

  • Example;
  • Someone sends you Bitcoin from Tornadocash and you have a account on Aave. Aave now has to freeze your account on Aave and will no longer allow you access to those funds, indefinitely.
  • So a person, who has their life savings in Aave, whom anyone sends a transaction from TornadoCash will have their funds frozen on Aave.

  • Example: Someone sent 0.1 ethereum to several celebrity commedians whose ethereum wallet addresses were known, from Tornado Cash, and Circle, a money transmitter in the US froze their Ethereum wallets.

  • Example Justin Sun. Someone who knew Justin Suns public wallet address, sent him Etherteum from Tornado Cash and now Aave froze his account. Justin Sun doesn't live in the US, and he isn't a US citizen, so technically he isn't subject to US laws. However, Aave is a registered US company and it froze his account, due it's legal obligations under the recent US Treasury Department ban / sanctions of Tornado Cash.

  • Happy about what happened to Justin Sun?

  • Some of you are possibly happy to see bad things happen to Justin Sun, but you need to realize that many of you may have this same vulnerability.

This problems reveals another problem; the decentralization problem.

  • One of the big problems with cryptocurrency right now, is that it has a core principle of decentralization which is suppose to mean investors in cryptocurrency have individual control of their cryptocurrency tokens using their special passwords known as private keys.
  • But most cryptocurrency investors live and operate in a crypotocurrency economy dominated by centralized businesses, like UST (Tether), USD Coin (USDC), and lenders or defi projects like Aave, to which the investors voluntarily give control of their cryptocurrency monies to utilize these crypto businesses.
  • The Aave businesses ability to freeze Justin Sun's funds is illustrative of the irony, where very smart, very rich and very well known cryptocurrency investors have their cryptocurrency monies in accounts, on these centralized business, and thus their cryptocurrency monies are not under their control.
  • This aspect of centralization in a supposedly decentralized system, is the same problem the cryptocurrency world faced with Terraluna, Voyager, #arrows Capitol, centralized entities controlling investors cryptocurrency tokens. When will we fix this problem?

Last Words

What to do?
  • This is not financial advice, but I am trying to educate you as to the risks here: consider this action: remove your cryptocurrency from Banks, Money Transmitters or Money processors, which are in the US or registered in the US and subject to it's laws, and place your assets somewhere they can't be frozen if this issue gets even larger.
  • Decentralize control of your funds and know who you are doing business with, as it creates vulnerabilities for you, where you could lose your money.
Could this problem get bigger?
  • What if this ban extends to exchanges as entities for interacting with Tornado Cash, all the exchanges funds could be frozen, and that could include your funds stored on the exchange.
  • It's to late to move your tokens once your account is frozen, because the ban treats everyone; criminals and the innocent the same.
  • Cryptocurrency.. the more you learn, the more you realize there's more you don't know.
@shortsegments

References for further Reading on this issue:

Article 1 article 2 article 3 article 4 article 5 article 6 article 7

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