Few episodes in crypto have divided the industry as sharply as the sanctions against the Tornado Cash mixer. On one side stands the state, for which a tool that anonymises transactions is above all a machine for laundering stolen funds. On the other stands part of the community and its developers, for whom privacy is a fundamental right, not a crime. In this lesson we examine both positions, work out where the line runs between lawful anonymity and money laundering, and consider what this debate means in practice for anyone running an AML check.
Tornado Cash is a decentralised mixer on the Ethereum blockchain. It works as a smart contract: users deposit coins into a shared "pool" and later withdraw them to a different address. Because the pool blends the funds of many people, the link between sender and recipient is broken — from the outside it is impossible to say with any confidence who transferred what to whom. Technically, this is a powerful privacy tool. But that very same property makes it ideal for concealing the trail of stolen money.
In August 2022, the U.S. Office of Foreign Assets Control (OFAC) imposed sanctions on Tornado Cash. It was an unprecedented step: for the first time, the target of sanctions was neither a person nor a company, but a smart contract — lines of code on the blockchain. The formal justification was that the North Korean group Lazarus had used Tornado Cash to launder part of the ~$625 million stolen in the Ronin bridge hack. For the regulator the logic was direct: a tool being used systematically to launder the funds of a hostile state must be blocked.
Opponents of the sanctions objected that the tool is neutral — it is the abuse of it that is criminal, not its very existence. The most prominent voice for this position was Ethereum co-founder Vitalik Buterin.
Vitalik Buterin publicly acknowledged that he had used Tornado Cash himself — to donate funds to Ukraine anonymously, without revealing his own addresses.
— a paraphrase of Vitalik Buterin's public position: an example of the lawful use of privacy.
The argument here is subtle and important. In donating to Ukraine's military and humanitarian needs, a donor could reasonably not want his address — and through it his entire balance and full transaction history — to become publicly known, including to the enemy. In this case privacy protects not a criminal but an ordinary person exercising the lawful right not to expose his finances to the whole world. In traditional finance, banking secrecy is the norm; on a fully transparent blockchain there is no such thing "by default," and a mixer partly fills that gap.
The key question is not "did the person use a mixer," but what kind of coins passed through it, and with what intent. This is exactly where two truths meet: the right to privacy and the duty not to launder criminal proceeds.
The practical trouble is that from the outside, looking only at the blockchain, it is impossible to tell a "lawful donor" from a "laundering hacker" at the point of entry into the mixer — that is the entire point of a mixer. So both the regulator and compliance are forced to assess not intent (which is invisible) but the very fact of contact with a high-risk tool.
For an AML specialist, the philosophical debate about privacy is important for understanding the context, but in practice a harder rule applies: contact with a mixer is a red flag of risk, regardless of whether a particular user was a Ukraine donor or a Lazarus hacker. The person running the check is not a court and cannot reliably establish intent; he assesses risk.
Two truths of one tool
The tool is one and the same — the intentions are opposite. From the outside they cannot be told apart, so risk is assessed on the fact of contact.
The privacy debate will stay with the industry for a long time: anonymisation technologies will keep evolving, and regulators will keep responding. But as long as the practical risk rule applies, it is important for the person running the check to understand both sides and not confuse the lawful right to privacy with the task of money laundering. In the next lesson we look at transparency from the other side — how that very openness of the blockchain becomes a weapon in the hands of on-chain detectives against criminals.
This material is for educational purposes and does not constitute legal advice.