In 2022, US authorities took strict action against crypto mixer Tornado Cash. Subsequently, OFAC (Office of Foreign Assets Control) blocked access to the platform and detained one of its developers. Despite this, cryptocurrency enthusiasts are not going to give up and are already developing new anonymity options. One of them is Privacy Pools, which will soon be available. Here we give you a better idea of what's going on.
As is usual, we should start with a brief explanation. Most cryptocurrencies provide pseudo-anonymity, which means that the person holding the address will remain unidentified when verifying blockchain transactions. However, if their identity is revealed - for example because of regular transfers from a cryptocurrency exchange that required KYC documents - then user behaviour can be traced without difficulty. Despite this, blockchain observers can easily study the balance of a particular address, its transactions, connectivity to multiple decentralised protocols and more.
Cryptocurrency users can improve their privacy in two ways: by using private altcoins, such as ZCash and Monero, and by using cryptocurrency mixers, such as Tornado Cash.
Essentially, the mixers combine the coins of many users and then distribute them to individual addresses that have already been selected by the users. This means that any connections between the original addresses and the person's coins become unclear, and their money ends up being transferred to the new wallet without any trace of its previous location.
Unfortunately, in August 2022, Tornado Cash was blocked by US authorities, who placed its blockchain addresses on an SDN or sanctioned blacklist that prohibits US citizens from interacting with them. Subsequently, those with those addresses are also not allowed to use the exchange platforms.
Alexey Pertsev was subsequently detained in the Netherlands and allegedly involved in money laundering. Pertsev's circumstances remained the same, but other coders are trying to build alternative privacy platforms.
Sanctions against Tornado Cash were initially imposed because North Korean criminals were using the platform to launder money, which of course did not go unnoticed by US intelligence agencies. In the end, Congress questioned whether it was reasonable to obstruct Tornado Cash.
Privacy Pools is the logical extension of Tornado Cash and was recognised as such by its developer, Amin Suleimani, who played an important role in creating the blocked platform.
According to Decrypt's sources, Privacy Pools allows anonymous transactions with Ethereum and was designed to avoid prosecution by US authorities; this was achieved by implementing an algorithm that can confirm that users are outside of North Korea and have no connection to previously identified fraudulent crypto-addresses.
By doing this, the developers are essentially trying to give cryptocurrency holders the right to privacy. Those who use blockchain mixers do not have to be lawbreakers; like the Tornado Cash platform, when users choose the withdrawal option, a zero-disclosure proof is generated. This verification demonstrates that digital currency owners are not associated with any illegal address on the blockchain. It should be noted that zero-disclosure proof is a cryptographic technique that proves accuracy without public disclosure.
The likelihood of Privacy Pools being able to avoid being monitored by US intelligence agencies. This is unlikely due to an increased regulatory approach to the cryptocurrency industry in light of North Korean hacking activity. Moreover, if developers compromise customer privacy for the sake of greater security, it is likely that the platform will be shunned by digital asset enthusiasts.
Nevertheless, it can be assumed that in the short term it will function, allowing users to exercise their right to privacy through a smart contract that effectively does its job. However, as events in the summer of 2022 have shown, it could be discontinued at any time.
