ETH Privacy Tool Tornado Cash Starts Blocking Sanctioned Addresses

Tornado Cash is apparently using Chainalysis oracles to block access from US Office of Foreign Assets Control (OFAC) addresses. The blockade only applies to the Tornado front-end, not the underlying smart contract:

As a fully decentralised protocol for private transactions of Ethereum, Tornado Cash last year announced it would be integrating with Arbitrum, the layer-2 solution that leverages optimistic rollups for Ethereum dApps.

Maintaining financial privacy is essential to preserving our freedom, [though] it should not come at the cost of non-compliance.

Tornado Cash

Tornado Cash works by “breaking the on-chain link between source and destination addresses”. Deposits go into a smart contract, where they are mixed around with others, and can then be withdrawn by a new address, making it more private.

The Chainalysis oracle is a smart contract that works on Ethereum and several other networks, including Avalanche, BNB Smart Chain, and sidechain and layer-two networks such as Polygon and Optimism. Simply put, Tornado Cash is a piece of code that scans crypto addresses and determines whether they are subject to sanctions from the US or other governments, and if so, the wallet is blocked.  

Tornado Cash Facilitates Hackers

Earlier this month, Inverse Finance, a decentralised lending protocol built on Ethereum, lost over US$15 million in a DeFi hack. Hackers were able to take out massive loans and get away with it through Tornado Cash.