The Tornado Cash developer says the “sequel” to the crypto mixer aims to be regulator-friendly

A former Tornado Cash developer claims to be building a new crypto-mixing service that aims to solve a “critical flaw” at the sanctioned crypto-mixer – which he hopes will convince US regulators to reconsider their position on privacy mixers.

The code for a new Ethereum-based mixer, “Privacy Pools,” was released on GitHub on March 5 by its creator, Ameen Soleimani.

In a 22-part Twitter thread, Soleimani explained that the “critical flaw” with Tornado Cash is that users cannot prove they are not associated with North Korea’s Lazarus Group or any criminal enterprise for that matter.

However, with Privacy Pools, Soleimani explained, depositors and withdrawers could opt out of an anonymity set containing an address associated with stolen or laundered funds.

This function of Privacy Pools is performed with zero-knowledge (ZK) proof, which means that the privacy of the user is preserved:

“Now users have the ability to help regulators isolate illicit funds, without revealing their entire transaction history […] With privacy pools, just because someone puts into the same smart contract as you, doesn’t mean they can force you to share an anonymity set with them too. It is your choice.”

Soleimani gave a demonstration of how Privacy Pools are used:

The developer hopes the solution will give “the community the opportunity to defend itself against hackers who abuse the anonymity sets of honest users without requiring general regulation or sacrificing crypto ideals.”

While Privacy Pools is already live on Optimism, Soleimani noted that the first version of the privacy protocol is still in its “experimental” stage because the code is not complete and has not been revised, but he is “pretty close to having this ready”.

To see the progress of the protocol further, Soleimani wants on-chain forensics platforms like Chainlaysis and TRM Labs to perform tracking on deposits so that users of the privacy tool don’t have to manually create their own subset exclusion lists.

In arguing for privacy protocols on the chain, Soleimani cited what he described as an “excellent” report from the Federal Reserve Bank of St. Louis in Missouri that examined the trade-offs between privacy on the chain and regulation:

“Their report proposes to achieve effective regulation by allowing Tornado Cash users to provide receipts to an intermediary, thereby disclosing their entire transaction history to the intermediary, but still being able to have privacy with respect to other public blockchain users.”

The developer hopes this can help “start a conversation” with US regulators about how privacy in the chain can be preserved, while limiting criminal activity through the use of ZK evidence.

Related: On-chain privacy is key to the wider mass adoption of crypto

Soleimani’s attempt to create a crypto-friendly on-chain privacy solution comes after the US Office of Foreign Asset Control (OFAC) sanctioned ETH and USDC addresses linked to Tornado Cash on August 8 in response to several alleged thefts by North Korea’s Lazarus Group, who was claimed to have routinely used the privacy mixer to preserve anonymity.

Shortly after the August 10th sanction, Alexey Pertsev, the creator of Tornado Cash, was arrested by authorities in the Netherlands and is currently facing a number of money laundering charges. He remains behind bars and his next hearing will take place at the end of April.