Thorchain was called a money laundering protocol – a label without decentralized finance project (DEFI) wants unless it is ready to have regulators who breathe in her neck.
His supporters have rejected criticism by defending decentralization, while his criticisms underline the recent activities that have shown some of the centralized tendencies of the protocol.
After having exploited the balance sheet for $ 1.4 billion, the North Korean pirates supported the state behind the attack, known as the Lazare group, flooded in Thorchain, which makes them their first choice to convert stolen funds from Ether (ETH) to Bitcoin (BTC). Lazarus finished converting her ether within 10 days of hacking.
The controversy has triggered internal conflicts, governance cracks and developer resignations, exposing a deeper problem and question: Can the DEFI remain neutral when the criminals exploit it on a large scale?
Thorchain is not a mixer
Thorchain is a decentralized exchange protocol, so some say that it is unfair to call it a laundering machine, because the exit is traceable. It is not like a mixer, the aim of which is to hide cryptocurrency funds – although the reasons for using mixers vary between users, some simply wishing to preserve their privacy and others who use them for illicit purposes.
Federico Paesano, investigations lead to Crystal Intelligence, argued in a Linkedin article that it is wrong to declare that the North Korean pirates “washed” the hacking of Bybit.
“So far, there has been no concealment, only a conversion. The stolen ETH was exchanged for BTC using various suppliers, but each exchange is completely traceable. It is not whitening; It’s just an active movement through the blockchains. »»
The tracing of the funds exchanged on Bitcoin takes time, but not impossible. Source: Federico Paesano
The pirates also moved funds via Uniswap and Okx Dex, but Thorchain has become the focal point of the examination due to the volume of funds that crossed it. In a March 4 position, the CEO of Bybit, Ben Zhou, said that 72% of stolen funds (361,255 ETH) had crossed Thorchain, far exceeding activities on other DEFI services.
More than a billion dollars of ether from the survey flight were traced in Thorchain. Source: Coldfire / Dune Analytics
The strength of a truly decentralized platform lies in its neutrality and its resistance to censorship, which are fundamental to the Blockchain value proposal, according to Rachel Lin, CEO of Exchange decentralized synfutures.
“The border between decentralization and responsibility can evolve with technology,” said Lin at Cointelegraph. “While human intervention contradicts the ethics of decentralization, innovations in the protocol could automate the guarantees against illegal activity.”
In relation: From Sony to Bybit: How Lazarus Group has become the Crypto Supervillain
Thorchain received at least $ 5 million in costs of these transactions, a windfall for a project already struggling with financial instability. This financial advantage has further fueled criticism, some wondering if Thorchain’s reluctance to intervene was ideological or simply a question of self-service.
Source: Yogi (Screenshot cropped by Cointelegraph for visibility)
Governance cracks show that decentralization becomes a shield
The controversy has sparked a dilemma on the question of whether Thorchain should act. In an attempt to block pirates, three validators voted to interrupt ETH trading, effectively closing their exchange route. However, four validators quickly voted to cancel the decision.
This revealed a contradiction in Thorchain’s governance model. The protocol claims to be absolutely decentralized, but it was previously intervened to suspend its loan function due to risk of insolvency (exchanges remained operational).
Some members of the cryptographic community have called Thorchain’s actions as a selective decentralization, where governance intervention only occurs when it serves the own interests of the protocol.
Source: Dan Dadybayo
The backlash was immediate. Pluto, a key Thorchain developer, resigned. Another developer, TCB, who identified himself as one of the three validators who voted to stop the ether professions, hinted unless the governance problems are resolved.
Meanwhile, the blockchain investigator, Zachxbt, called Asgardex, a decentralized exchange based in Thorchain, so as not to be back earned by pirates, while other protocols would have reimbursed poorly acquired gains.
Thorchain’s founder John-Paul Thorbjornsen said, saying that centralized exchanges use millions of millions of people by facilitating illicit transactions unless the authorities are pressed by the authorities.
“It pisses me off. Do we have ETH and BTC nodes to restore their transaction costs? What about Geth or BTCCore developers – who write the software, funded by grants / donations? Asked Thorbjornsen.
Source: Zachxbt
The growing regulatory risks of Thorchain, as previously demonstrated by confidentiality tools
For the moment, Thorchain has avoided any direct measure of the application of governments, but history suggests that the protocols DEFI facilitating illegal finance may not escape a careful examination forever. Tornado Cash, a well -known crypto mixer, was sanctioned by the US Treasury in 2022 after being used to laundering billions of dollars, although he was then canceled by an American court. Likewise, Railgun went under FBI control in 2023 after the North Korean hackers used it to move $ 60 million in stolen ether.
In relation: The Developer in species of Tornado Alexey Pertsev leaves police custody
Railgun has a unique case because it is marketed as a privacy protocol rather than a mixer or a dex. But the distinction always makes comparisons with Thorchain, since confidentiality protocols are often confronted with criticism to potentially allow illicit activities.
“Critics often say that privacy projects allow crime, but in reality, the protection of financial life is a fundamental right and a cornerstone of decentralized innovation,” said Crointelegulegan to Crointegulegan at the University of British Columbia in British Columbia.
“Technologies such as ZK trusted execution environments can secure user data without fully masking illegal activity. Thanks to optional transparency measures and a robust onchain criminalic, suspicious models can always be detected. The objective is to find a balance: to allow confidentiality users while ensuring that the system has integrated guarantees to discourage and draw illegal use. »»
Lin of Synfutures has said that continuously illegal use of decentralized protocols would “absolutely” lead the drastic measures of the authorities.
“Governments will probably increase measures if they perceive decentralized protocols as systemic risks. This could include addresses of sanction protocol, supply infrastructure providers, black networks or prosecuting manufacturers, “she said.
Increasing pressure against Thorchain
Thorchain supporters argue that he is unjustly distinguished because the pirates have also used other DEFI protocols. But the regulators tend to focus on the largest catalysts, and Thorchain treated the vast majority of the stolen funds from the bybit. This makes it an easy target for application actions ranging from the sanctions of the Office of Foreign Assets (OFAC) to the prosecution by the developers.
“When the enormous majority of your flows are stolen funds from North Korea for the greatest money robbery in human history, this will become a national security problem, it is no longer a game,” wrote TCB on X.
“The threshold you want to be credible, you need a network of 1000+ unique validators. There is a reason why @Chainflip has solved this problem at the network so quickly and all the fronts apply censorship. »»
If the regulators decide to repress, the consequences could be serious. Sanctions against Thorchain validators, frontal service and liquidity suppliers could paralyze its ecosystem, while major exchanges could bring Rune (Rune), reducing its access to liquidity.
There is also the possibility of legal action against the developers, as shown in the tornado file, or the pressure to introduce compliance measures such as the filtering of the sanctioned address – something that would contradict the decentralized ethics of Thorchain and alienate its main user base.
The entanglement of Thorchain with the North Korean pirates put it at a crossroads. The protocol must decide to take measures now or risk bringing regulators to make this decision for them.
For the moment, the protocol remains firm in its approach to a leave, but history suggests that deffi projects that ignore illicit activity do not remain untouchable forever.
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