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The WBTC and Tornado cash sanctions remain in focus. The US Treasury Department recently announced its decision to do so Sanctioning Tornado Cash and all associated wallet addresses. They highlighted that the service has helped launder over $7 billion worth of cryptocurrencies since its launch in 2019.

US-based companies and individuals have been strongly advised not to use or interact with them Tornado Cash Smart Contracts. Failure to cooperate with the Office of Foreign Asset Control (a branch of the US Treasury Department) can result in a 30-year prison sentence.

North Korean hackers among Tornado Cash’s top clients

Tornado Cash, like any Virtual Private Network (VPN), is designed to protect the anonymity of its users by encrypting all transaction data into an unreadable format. Transactions on the Ethereum blockchain and its subsidiary EVM networks could thus be conducted discreetly.

Although the main goal of the service was to facilitate on-chain privacy, the software’s indiscriminate encryption of all transactions makes it popular with criminals looking to covertly launder funds.

Officials reported that the Ronin attackers, who were allegedly aided by the North Korean government in their hack of Axie Infinity’s Ronin network, were able to safely transfer the $600 million in stolen funds through the service – $10 million each.

According to Ari Redbord, head of legal and government affairs at crypto-regulatory startup TRM Labs, an estimated billions of dollars in North Korean money laundering schemes were transferred through Tornado Cash.

WBTC and Sanctions: Regulatory scrutiny impacts DeFi’s top assets

Other significant DeFi assets have already responded to the sanctions. For example, the issuer – Circle – has locked over 75,000 USDC owned by Tornado users. Tether’s USDT may also need to blacklist certain sanctioned Tornado addresses.

In response to recent OFAC sanctions, BitGo, like its competitors, may freeze all wBTC assets transferred via Tornado Cash. BitGo is a digital asset trust and security company based in New York. Since the company is based in the United States, it is heavily regulated by the relevant authorities.

What is wrapped BTC?

Wrapped BTC allows users to transfer the value of BTC (Bitcoin’s native asset) from the Bitcoin blockchain network to the Ethereum blockchain network, thus interacting with the Ethereum ecosystem.

wBTC issuance is managed by a Decentralized Autonomous Organization (DAO). Its main function is to add or remove merchants and administrators. Traders can start a coin by sending bitcoin to BitGo (sole custodian of Wrapped BTC) and is compensated with wBTC in return.

The future of DeFi is uncertain

The sanctions imposed by OFAC underscore the ongoing battles between the US government and the cryptocurrency industry.

Such a decision can potentially throw regulated DeFi sectors into the mix unless major industry players prioritize and encourage efforts to grow financial decentralization.

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