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Crypto Mixer Blender Slapped With Sanction For Its Role In $620M Axie Infinity Hack

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Centralized crypto mixer Blender.io got hit with first of its kind sanctions over its alleged role in the infamous $620 million online gaming platform Axie Infinity by the U.S. Department of the Treasury’s Office of Foreign Assets Control [OFAC].

As per the press release, Blender was used in processing over $20.5 million of the stolen funds, carried out by the Democratic People’s Republic of Korea [DPRK] sponsored cyber hackers, Lazarus Group.

The P.A also mentioned that the treasury will update the List of Specially Designated Nationals and Blocked Persons [SDN List] to identify additional digital currency addresses used by the Lazarus Group to launder illicit proceeds. 

Treasury is committed to exposing components of the virtual currency ecosystem, like Blender, that are critical to the obfuscation of the trail of stolen proceeds from illicit cyber activity, the blog post read.

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Crypto Mixer Blender Slapped With Sanction For Its Role In $620M Axie Infinity Hack 2

Reeling under severe pressure from U.S. and UN sanctions, the DPRK has fallen back on illicit activities, including cyber-enabled heists from cryptocurrency exchanges and financial institutions, to fuel its unlawful weapons of mass destruction [WMD] and ballistic missile programs, the treasury dept claimed.

Cryptocurrency mixers that assist illicit transactions will be severely dealt with- US Secretary

Under Secretary of the Treasury for Terrorism and Financial Intelligence, Brian E. Nelson stated,

Today, for the first time ever, Treasury is sanctioning a virtual currency mixer. Virtual currency mixers that assist illicit transactions pose a threat to U.S. national security interests. We are taking action against illicit financial activity by the DPRK and will not allow state-sponsored thievery and its money-laundering enablers to go unanswered.

Earlier TronWeekly covered an article where UN officials in a media briefing alleged that North Korea used stolen digital assets worth several millions of dollars to fund its nuclear and ballistic missile program.

It also mentioned that between 2020 and mid-2021 cyber-attackers originating from the nation stole more than $50 million of digital assets.

A study published by online security platform Chainalysis suggested that North Korean cybercriminals could have netted a staggering $400 million worth of cryptos last year.

Despite imposing massive sanctions, the UN report says North Korea continues to seek material, technology, and know-how overseas, including through cyber means and joint scientific research.

Here’s how Tornado Cash prevents sanctioned wallets to gain access

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Ethereum’s crypto mixer Tornado Cash, stated today that it uses a tool from blockchain data platform Chainalysis to bar addresses sanctioned by the U.S. Office of Foreign Assets Control [OFAC] from using the privacy app. “Maintaining financial privacy is essential to preserving our freedom, however, it should not come at the cost of non-compliance,” the firm wrote.

However, one of the protocol’s founders later tweeted that the blockade is only applicable to the user-facing decentralized application [dapp], not the underlying smart contract.

Notably, one of the founders of Tornado Cash, recently said it is “technically impossible” for sanctions to be enforced against decentralized protocols because of how they are designed. We don’t have more access to it than any other users” of the protocol, Roman Semenov, one of three founders of Tornado Cash said in an interview from Thailand. “There’s not much we can do.”

Regulators may not see it the same way.

Ari Redbord, head of legal and government affairs at blockchain intelligence firm TRM Labs said, “What FATF says is ‘hey, we don’t care what you call yourselves, decentralized or DeFi, what we care about is what you are doing.”

Despite Tornado Cash’s popularity, hackers seem to have a field day

Tornado Cash has seen rapid growth over the last year to become one of the most popular crypto mixers. Nicolas Smart, director of blockchain intelligence and data at Crystal, said Tornado Cash’s dominance has increased in part because of the growing popularity of DeFi, which has resulted in more crypto wallets holding greater amounts of wealth.

The decentralized mixing tool founded in 2019 has grabbed the limelight mostly for its usage by questionable actors in several high-profile hacks. In January, hackers used the tool to swipe $34 million from Crypto.com.

One cannot forget the infamous crypto personality “Sifu”, who was involved with the Wonderland project and turned out to be the co-founder of the failed crypto exchange QuadrigaCX. 

The announcement follows Thursday’s events reported by TronWeekly about the North Korean hackers who were allegedly behind the $625 million exploits of Axie Infinity’s Ronin blockchain. The Ronin attackers “have so far sent $80.3 million worth of ETH through Tornado Cash,” tracing firm Elliptic wrote Thursday.

Crypto Mixers are “not inherently illegal” despite their bad rep, says Expert

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Crypto Mixers such as the popular Tornado Cash have gained notoriety over the years as criminals used these software tools to launder millions of dollars worth of cryptocurrency. There were several such instances of misuse in the past. Last year, an Ohio native operating a Bitcoin mixer called Helix pleaded guilty to laundering more than $300 million.

Another man was charged in April of 2021 for washing $335 million over more than 10 years, used a BTC mixer called Bitcoin Fog. Coming to this year, a hacker stole more than $33 million from Crypto.com in January, then allegedly washed the currency through an Ethereum mixer. They still remain untraced. 

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Crypto Mixers are “not inherently illegal" despite their bad rep, says Expert 4

But despite their bad reputation, they’re “not inherently illegal and can be used for legitimate privacy purposes,” Kim Grauer, director of research at blockchain analysis firm Chainalysis, told in an interview.

So, what are Mixers?

Mixers are tools that jumble up coins in private pools before sending them out to their intended recipients. The intention behind this is to remove any trace of digital signatures associated with a trade, rendering anonymity.

However, each mixer is built differently. Some, like Blender.io, are centralized, while others, like Tornado Cash, claim to be decentralized, or run purely by code. One of the most popular Tornado Cash operates by severing the transaction trail. It then breaks the on-chain link between the deposit and withdrawal to “improve transaction privacy,” according to its website. 

Are These Crypto Mixers Illegal? 

Chris DePow, a senior advisor of regulation and compliance at Elliptic, a blockchain analysis firm stated, “There is nothing necessarily illegal about users wanting their crypto transactions to remain private. In the real world, he points out that physical cash transactions can be done without anyone knowing. 

Tornado Cash co-founder Roman Semenov told Bloomberg earlier this month that the protocol falls under the “anonymizing software providers” definition, excluding them from regulations in the U.S. that are required to follow “know your customer,” or KYC, rules.

“All we do is write code and publish it on GitHub,” Semenov added. “This is pretty close to the definition of free speech so writing code cannot be illegal.”

Whether regulators conform with that argument is a different story.