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Tornado Cash was sanctioned over e.g. Monero, ZCash or Secret Network that fulfill the same shieled transaction purpose but have existed longer. The reason for this was that Tornado Cash attracted North Korean Lazarus group to use it. The reason why Lazarus used it was that it was non-custodial (no risk of criminals stealing other criminals) and ETH had better exit liquidity over XMR and ZCash that are not often listed on the shady exchanges. When national security interest card is played, laws and even the constitution do not seem to weight so much anymore in the US.

If Tornado Cash had been modified in a way that it could not allow easily to deposit and withdraw large amounts by limiting flow/liquidity it would have been less attractive for Lazarus and other hack group purposes. For example, Harmony One hack $100M was pushed through Tornado in one day.

Tornado Cash has a compliance tool that could allow centralised exchanges and fiat off ramps to trace transcations through Tornado. However, in practice some US political allies, like those in Dubai, run shady OTC desks that do not do it, making Tornado very practical tool for hack laundering.

The best outcome for the situation would be

- Tornado Cash code is ”unsanctioned” or deemed free speech

- Someone builds a service for shielded transactions that has features to discourage its use for nation state scale money laundering

Ransomware groups have been using Monero and Bitcoin as well, it isn't like Tornado was a unique player. I seriously doubt that with Tornado banned suddenly money laundering and hacking will stop. If anything it will make regulators' life harder as it will all now disperse into other tools rather being centralized into a single place, and hardcore cypherpunks will be more motivated to build even better tools.

The argument you're likely to get is something along the lines of "just because the rules don't stop everybody, that's not an argument not to have the rules."

But you're right. In this case it won't do much. But it justifies the salary of many bureaucrats. They can play whack-a-mole and no one will think too hard about it, because hey it's hardened criminals they're going after right? The 'moles' will simply scatter elsewhere and those arguing to whack the moles will always have the moral upperhand, so the salaries of the mole whackers will always be secure.

It is more like a random audit than whack-a-mole. It will scare off a huge amount of small time players with lives they don't want ruined that had thought they could use it to tax dodge. Maybe they still can, but now they have a chance of random audit hanging over their head.

Earlier in May Bitcoin mixer blender.io was sanctioned for the same reason. While hacking and money laundering does not stop, small steps can be made to limit the exit liquidity for ransomware/scam/hack/phishing even without drastic KYC/AML/FATF travel rule measurement.

Because the alternative is that the regulators attempt compliance theater and you need to scan your passport every time you do a transaction and then your identity information is being stolen left and right.

Monero wasn’t sanctioned because it is not positioned as a mixer like Tornado Cash is.

> The whole thing seems really hamfisted and poorly thought out. The US Secretary of State even tweeted incorrectly that North Korea built Tornado, then had to delete the tweet!

Somewhat tangentially, if it is an official government account, it's crazy to me that they can get away with deleting tweets (and subsequent interactions on those tweets) without an official record.

I can see valid reasons to delete a inaccurate and misleading statement, but this requires substitution with a link to the archived message and a public statutory countdown to a seven days grace period before any misleading public servant either publishes a formal explanation for their errant communication or is automatically forfeit the mechanism of their office. Possibly the forfeit could be incrementally enforced for graded infractions, but given the gaming culture in every reach of human responsibility I think it should be a simple and clear cut off.

Source code may be free speech, but operating as a money transmitter is not. It is a regulated industry.