dYdX confirms blocking (and unblocking) some accounts flagged in Tornado Cash controversy

The platform said it has used compliance vendors to scan for and flag accounts potentially associated with illicit activities, including sanctions lists for many countries.

Cryptocurrency derivatives trading platform dYdX said it blocked some users’ accounts with funds linked to Tornado Cash, including mistakenly suspending some that never directly engaged with the controversial mixer.

In a Wednesday blog post, dYdX said it had “unbanned certain accounts” that the derivatives platform had blocked in response to the Office of Foreign Assets Control of the United States Treasury Department adding Tornado Cash to its list of Specially Designated Nationals, or SDNs. According to dYdX, its compliance provider flagged many accounts believed to be linked to Tornado Cash, which the platform subsequently blocked — despite the fact some had never dealt with the crypto mixer. The platform said it has used compliance vendors to scan for and flag accounts potentially associated with illicit activities, including sanctions lists for many countries.

“This sudden influx of flags affected many account holders that never directly engaged with Tornado Cash, and often such users do not realize the origin of the funds transferred to them during various transactions prior to interacting with our platform, but we must nevertheless maintain certain restrictions,” said dYdX.

We were recently made aware of an issue related to Tornado that was causing many wallet addresses to be blocked from accessing our exchange. We have rectified this and you can read the full announcement here: https://t.co/h9TDZE1rne

— dYdX (@dYdX) August 10, 2022

According to dYdX, banning the users did not amount to seizing funds, which they said would always be available for withdrawals. However, the platform can place accounts in “close-only mode.”

Many crypto trading platforms have blocked access to Tornado Cash following the U.S. Treasury adding the controversial mixer to its sanctions list on Aug. 8. As an SDN, “U.S. persons are generally prohibited from dealing with them,” and firms and individuals listed have their assets blocked — this would include 44 USD Coin (USDC) and Ether (ETH) addresses connected to Tornado Cash.

Following the sanctions announcement, stablecoin issuer Circle froze more than 75,000 USDC worth of funds on addresses listed by Treasury officials. However, actions against individuals associated with the crypto mixer extend beyond centralized exchanges based in the United States. Tornado Cash co-founder Roman Semenov reported developer platform GitHub had suspended his account. On Tuesday, Web3 development platform Alchemy and Infura.io followed by blocking remote procedure call requests to the mixer.

Some critics of the Treasury’s decision to add Tornado Cash to its list of SDNs have said the crypto mixer is a “neutral tool” that can be used by anyone, rather than a platform aiming to use it for illicit purposes. In a Tuesday statement, Lia Holland of tech advocacy group Fight for the Future called the Treasury’s actions “clumsy” by using sanctions against bad actors like North Korean hacking group Lazarus that also affected users with “legitimate reasons to seek anonymity in financial transactions.”

“Tornado.cash is code, and rather than identify those who were aiding and abetting criminals the Treasury simply sanctioned that code,” said Holland.