What Is Tornado Cash and Why Is It on Trial?
Tornado Cash is a decentralized cryptocurrency mixer built on Ethereum and other blockchains, designed to enhance transaction privacy by pooling and mixing crypto assets through smart contracts. Operating without centralized control, it uses cryptographic proofs to break on-chain links between senders and recipients while maintaining fund availability. The system is maintained through community governance and voluntary contributions rather than traditional fees.
In August 2022, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, alleging it facilitated the laundering of over $1 billion in illicit funds, including proceeds from hacks by North Korean cybercriminals (Lazarus Group) and ransomware attacks. The unprecedented move marked the first time a smart contract—not just a person or entity—was added to OFAC’s sanctions list.
Dutch authorities later arrested Tornado Cash developer Alexey Pertsev, charging him with money laundering. His trial, ongoing in 2024, raises critical questions about developer liability in decentralized finance (DeFi) and how regulators view privacy tools.
Tornado Cash’s Business Model: How It Works & Why It Attracts Regulators
1. How Tornado Cash Made Money
Unlike traditional businesses, Tornado Cash did not charge fees directly. Instead, its revenue model relied on:
- Voluntary donations from users who valued privacy
- Governance token (TORN) incentives for protocol participation
Since it was fully decentralized, there was no central company or team profiting directly from transactions.
2. Why This Business Model Contributes to Money Laundering
- No KYC/AML Checks: Tornado Cash did not screen users, allowing anyone—including hackers and sanctioned entities—to use it.
- Anonymity by Design: Unlike centralized mixers (which can be shut down), Tornado Cash’s smart contracts operated autonomously, making enforcement difficult.
- Cross-Chain Laundering: Funds could be mixed across Ethereum, Arbitrum, and other chains, complicating tracking.
Why This Matters for Institutional Crypto Operations
The Tornado Cash enforcement action makes clear that regulators now demand proactive compliance not just around counterparty identities, but crucially around the full lifecycle of on-chain transactions – a shift that responsible institutions should embrace through robust monitoring and screening solutions.
Key Compliance Shifts:
From Identity-Centric to Transaction-Centric Enforcement
- It’s no longer enough to verify user identities—you must monitor their on-chain behavior.
- Interacting with sanctioned contracts (even indirectly) can trigger compliance risks.
Smart Contracts Are Now Compliance Targets
- OFAC’s sanctions on Tornado Cash’s code, not just its creators, set a precedent.
- Institutions must now screen interactions with high-risk smart contracts, not just wallets.
Public Compliance = Trust & Survival
- After the sanctions, Circle (USDC), dYdX, and others publicly blocked Tornado-linked addresses to avoid regulatory backlash.
- Your screening policies are now a public signal to regulators, partners, and investors.
Key Lessons for Institutions
The Tornado Cash case establishes a critical precedent: code does not equal immunity. Regulators have demonstrated they will sanction even fully autonomous protocols if they facilitate criminal activity. This means institutions can no longer assume that decentralized or non-custodial systems operate beyond regulatory reach. The solution lies in implementing smart contract risk scoring systems that automatically flag interactions with high-risk protocols, whether they’re mixers, anonymization tools, or other potentially problematic decentralized applications.
The sanctions also highlight how indirect exposure creates compliance risk. Funds that merely pass through sanctioned protocols—even several transactions removed—can still taint subsequent transactions. This “guilt by association” risk requires institutions to go beyond simple address blacklists. The solution is multi-hop taint analysis, which traces funds across multiple transactions and chains to identify problematic origins. Without this capability, institutions risk unknowingly processing funds that regulators may later deem contaminated.
The most crucial lesson is that compliance must be proactive rather than reactive. In today’s regulatory environment, waiting for explicit enforcement action before implementing controls is too late—the reputational and legal damage will already be done. Institutions need real-time blockchain monitoring systems paired with automated sanctions screening to identify and block problematic transactions before execution. This shift from post-hoc compliance to preventative controls represents the new standard for institutional crypto operations. The organizations that implement these solutions now will be best positioned to navigate the evolving regulatory landscape while maintaining access to banking partners and traditional financial infrastructure.
Conclusion: The Future of Institutional Crypto Is Compliant by Design
Tornado Cash won’t be the last DeFi protocol facing regulatory action. As global AML standards tighten, institutions must adopt:
- KYT (Know Your Transaction) solutions – Monitor fund flows in real time.
- Compliance-as-a-Service – Outsource screening to experts.
- Audit-ready infrastructure – Prove adherence to OFAC, FATF, and local laws.
How ChainUp Helps Institutions Stay Ahead
ChainUp’s compliance infrastructure equips institutions with the tools needed to navigate today’s regulatory landscape:
- On-chain behavior analysis across 20+ chains
- Pre-built compliant rulesets according to regulations
- Wallet labeling & exposure scoring to flag high-risk transactions
- Compliance APIs for exchanges, custodians, and DeFi protocols
The future of institutional crypto demands more than speed—it requires auditable compliance at every step. ChainUp makes this possible. Explore our compliance solutions today or schedule a demo to see how we help enterprises stay ahead of regulatory requirements while maintaining operational efficiency.
