The event generated a huge amount of discussion on social media, not least for what appears to be a novel approach US authorities are now taking to illicit DeFi activity.
The North Korea Connection**
Without linking to the official notices, Secretary Blinken tweeted on Wednesday that Tornado Cash was a “DPRK state-sponsored hacking group”. This tweet has since been deleted and replaced with the following wording:
The new wording is correct. There is no evidence that Tornado Cash was financially backed or sponsored by DPRK or indeed any other nation state. Tornado Cash has been used by Lazarus Group, a North Korean state-sponsored cyber group sanctioned by OFAC in September 2019, on multiple occasions.
Blog post), also carried out by Lazarus. As too were the Harmony and Nomad heists from this summer, which saw around $100 million allegedly laundered through Tornado Cash.
DeFi Vulnerabilities**
Since then, all large heists have involved DeFi protocols. At least three have been carried out by Lazarus. This is the DPRK’s apparent modus operandi; DeFi theft is now a major source of revenue for the hermit state.
By exploiting DeFi protocols lack of centralisation - with no KYC or AML checks - they are forcing authorities to react in new and different ways. This is the conundrum that US regulators are now facing. Having announced that they would not bring DeFi within regulatory scope at this stage, it leaves the US in a difficult position. The remaining tool at their disposal is enforcement, through departments such as the Treasury.
Smart Contracts As a Person**
In this instance, however, no company or person is mentioned in the designation notice. Instead OFAC has sanctioned smart contracts which run Tornado Cash. Critically, they described the contracts as an “organisation”, established in 2019.
While its too early to tell if this is the US Treasury’s ultimate intention, the direction of travel opens up many more - legal and technical - questions for DeFi, for protocols, and for coders and their work product. Either way, North Korea may have forced DeFi regulations to be brought forward.