Former Developer of Tornado Cash Says the “Sequel” to the Cryptocurrency Mixer Will Be Regulator-friendly

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Last Updated on March 7, 2023 by Bitfinsider

A former Tornado Cash developer says he is creating a new crypto mixing service to address a “critical flaw” in the approved crypto mixer in the hopes that it will persuade American authorities to change their minds about privacy mixers.

Ameen Soleimani, the mixer’s inventor, published the source code for “Privacy Pools” on GitHub on Mar. 5. The “critical flaw” with Tornado Cash, according to Soleimani, is that users cannot substantiate their lack of ties to the Lazarus Group in North Korea or any other illegal organization, according to a 22-part Twitter thread he started.

However, Soleimani noted that with Privacy Pools, depositors and withdrawers could choose not to use an anonymity group that includes an address connected to money that has been stolen or laundered.

Zero-knowledge (ZK) proofs are used to implement this Privacy Pools function, protecting the user’s privacy: “Now, users have the option to help regulators isolate illicit funds, without revealing their entire transaction history. With privacy pools, just because someone deposits into the same smart contract as you, it doesn’t mean they can also force you into sharing an anonymity set with them. It’s your choice.”

Soleimani gave an example of how to use Private Pools via Twitter.

Source: Twitter

Without requiring broad regulation or compromising on crypto ideals, the developer expects that the answer will enable “the community to defend against hackers abusing the anonymity sets of honest users.”

The first iteration of the privacy protocol is still in its “experimental” stage because the code is incomplete and hasn’t been audited, but Soleimani said he is “pretty close to having this ready” even though Privacy Pools is already live on Optimism.

Soleimani wants to see the protocol advance by allowing on-chain forensics platforms like Chainlaysis and TRM Labs to perform tracebacks on deposits. This will spare users of the privacy tool from having to manually build their own subset exclusion lists.

Soleimani argued in favor of on-chain privacy protocols and provided the following example from what he called a “excellent” study by the Federal Reserve Bank of St. Louis in Missouri that looked at the trade-offs between on-chain privacy and regulation. He said: “Their report proposes to achieve effective regulation by having Tornado Cash users provide receipts to an intermediary, thus revealing their entire transaction history to the intermediary, but still being able to have privacy with respect to other public blockchain users.”

The creator hopes that this will “start a conversation” with American regulators about how ZK proofs can be used to protect on-chain privacy while limiting criminal activity.

After the U.S. Office of Foreign Asset Control (OFAC) sanctioned ETH and USDC addresses linked to Tornado Cash on August 8 in response to several alleged thefts by North Korea’s Lazarus Group, who were purported to have routinely used the privacy mixer to preserve its anonymity, Soleimani made an effort to develop a crypto-friendly on-chain privacy solution.

The creator of Tornado Cash, Alexey Pertsev, was detained by Dutch authorities shortly after the sanction was announced on August 10. He is presently charged with numerous counts of money laundering. His next meeting is scheduled for late April, and he is still being held in custody.

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