JACK: Alright, light’s red. We’re recording. Hey, Tortoni. You’re looking great today. Still
writing, I see. See, here in my studio, which is just my closet, I have a picture on the wall made
by Edouard Manet. It’s a picture of a fine-looking gentleman sitting at a table writing something
down. I call him Tortoni, but that’s not his name. This picture has captured my imagination
and curiosity for countless hours. I stare into it and I just fall into an abyss. But the thing about
this picture is that it’s not the content or even who made it. It’s that this picture was stolen
from the Isabella Stewart Gardner Museum back in 1990, and it’s never been recovered. I don’t have
the original; I just have a print of it. But the thieves didn’t just steal this picture; they took
a bunch of others, too, and this was the biggest single heist of all time. They estimated that
the art that was stolen is worth $500 million, and it still remains unsolved. I’m looking at
this picture on my wall right now. There’s a $10 million reward for it. Yeah, mine I just got from
my printer for like, five cents. It’s always been weird to me how art has so much value.
I just don’t see how this picture, which is not that much bigger than a regular sheet of paper,
is worth more than a mansion. But that’s no longer the biggest heist ever, because in 2022, a digital
heist happened which set a new record high. (INTRO): [INTRO MUSIC] These are true stories from
the dark side of the internet. I’m Jack Rhysider. This is Darknet Diaries. [INTRO MUSIC ENDS]
JACK: Digital assets are fascinating to me. I’m no economist, but they behave in ways that don’t make
sense to me. Let’s take audiobooks, for example. It takes a lot of work to make the first one,
but then infinite copies can be made at zero cost after that. So, I don’t know, what happens
when supply goes to infinity? It seems like the price would go down to nothing, but it’s not the
case. Audiobooks are still $10, $20 each despite there being an infinite amount of them which costs
nothing to make more of. That’s kind of wild, and you’d think that piracy would have destroyed the
market for digital assets, too. With unlimited supply, demand should have gone way down. But no,
the demand for digital goods is at an all-time high. Top-tier musicians are making more money now
than they ever did before, and that’s because we all have mobile devices glued to our hands 24/7,
and we’re continually thirsty for more digital content to consume. It almost seems like our
whole lives are digital now; movies, shows, memes, music, books. Even the people we are closest to,
we have a digital relationship with them. But I’m always wondering, of all the digital stuff in our
lives, is any of it really ours to own? [MUSIC] Okay, so, I think anything that’s saved
on your computer and you can use it offline — I’ll say that’s yours and you own that.
Photos that are saved on your phone; that’s yours. Music saved in MP3 form; that’s yours,
too. You own that. But the line is often blurry between what’s on our devices versus what’s on the
internet. If you have an Android phone, it tries to get you to back up your photos to Google Drive,
and it’s not always clear if your photo is on your phone or on Google’s servers. If it’s just
on Google’s servers, then you don’t really own it, do you, since they have complete and full control
of your photos. What about audiobooks? Let’s look at those for a minute. [MUSIC] Most audiobooks I
listen to I can actually borrow from the library, and there are apps which let you check them out.
You can listen to it for a few weeks and then return it digitally. It’s great. But often,
my library doesn’t have the book I want, so I’ve got to buy it. When I buy an audiobook,
the biggest marketplace for that is Audible, so I look there. What drives me crazy about
buying books from Audible is, well, I don’t own that book, like at all.
If I owned it, I should be able to save it locally, give it to a friend,
donate it to my library, or resell it to someone else like a used audiobook. But all that is
impossible to do through Audible. Of course, Audible could cancel your account at any time
and you would lose all of the books that you ‘bought’. So, to me, the audiobooks that you ‘buy’
on Audible are not really yours. You don’t own them at all. So, let’s look at some other digital
assets. How about my online accounts like Twitter or e-mail accounts or online gaming accounts? Do
I own my Twitter username? No, I don’t think so. Twitter does, and they graciously let me use it,
and at any moment they could terminate it or rip it out of my hands. I don’t have any actual
ownership of it. Just look at what happened when Twitter changed their name to X; there
was a user on Twitter who had the username X, and Twitter just ripped it right out of their hands
and there was nothing that user could do to keep it, because Twitter owns everyone’s account. Yet,
it’s interesting because even though you can’t own a Twitter account, they are still valuable
and people are buying and selling Twitter accounts all the time. Let’s look at video
games now. There are digital assets in video games, right? Imagine you’re playing an online
game and when you level up your character you get all kinds of armor and weapons and gold.
That character is yours, right? Well, I don’t think so. The game can ban you at any moment,
and then what? What about those in-game items like gold and weapons? It feels like that
stuff is yours, but it’s not really. You can’t save it offline or take it with you to another
game. It’s strange because even though you don’t own that stuff in the game,
those items still can have real-world value. I know I’ve bought an in-game weapon before for
a hundred bucks. It’s ridiculous because I bought something I don’t actually own. [MUSIC] Alright,
what about my website, darknetdiaries.com? Do I have ownership of that? Well, at first glance,
sure. I purchased the domain and I can do whatever I want on it. I’m the admin. I can say what I want
and nobody can stop me. But, no. First of all, I didn’t purchase the domain. I’m renting it.
All domains have to be renewed yearly or every few years. Registrars control the domains and you pay
them to get it. But then you have to keep paying them to maintain control of it. It seems like I
don’t own it if I have to pay someone over and over to keep it mine. On top of that, governments
can go to domain registrars and take over a domain that’s being used for illegal purposes.
So, yeah, I’d say I don’t actually own my domain if someone else can rip it out of my
hands like that or if it’ll expire after a while. But domains on the dark web are different.
I’m talking about on Tor, the darknet. See, on the dark web, domains look awful. They’re
a long string of random letters and numbers. You would never be able to memorize it, and then it
ends in .onion. So, how do you get a domain on the dark web? Is there a central body like I can
where you go to register domains with? Nope, no, not at all. You create the domain yourself. Yeah,
that’s right. You generate a private public key pair, and that public key is your domain name. So,
with this system, the person who has the private key controls that domain. Now, to me,
this is true digital ownership and I love that. Unless someone comes and steals my key from me,
nobody can ever take my .onion domain from me. It’s never going to expire and it can’t be seized
by the feds. This is why a lot of people are drawn to the dark web, to have something on the internet
that’s truly yours, and nobody can ever take it away from you. Another thing that I think gives
you true digital ownership is cryptocurrency. [MUSIC] Not all money is like that. Your bank
can refuse your service if they want. They can cancel your credit card and kick you out of the
bank and freeze your money. I know PayPal has frozen my account before, trapping my money
in there. But because cryptocurrency is built on decentralized blockchains, there’s no one managing
it to kick anyone out or freeze an account or take over an account. Everyone and anyone
is welcome at all times forever, and the best part is you truly own your crypto wallet.
Because to get a cryptocurrency wallet, you just make it yourself by generating a random
private key and then using that to derive a public key. When you do this, only you are the
only person who’s ever seeing that private key, and whoever has that private key controls that
public address or wallet. There’s no admin that can revoke your key or move your money without
your permission. Your key is your key forever and ever. The blockchain is a fascinating invention
and whether you love or hate cryptocurrency, the technology behind it is very interesting.
Take the Ethereum blockchain, for example. It popularized something called smart contracts
which allows people to add code into the blockchain, which means you can program money
and even create apps integrated directly into cryptocurrencies. This is wild and it’s opening
up a whole new future that we never imagined. For instance, people are making entire video games
with these smart contracts where the whole game lives on the blockchain, which means the in-game
currency is actually real cryptocurrency. Not only that, but the apps you make on the blockchain are
truly yours, where nobody can ever seize it from you or stop you from making it. It’s time
we step foot into this big, new, wild, digital world. I think the game Axie Infinity represents
a fundamental shift in video game development. I spoke to Geoff White about this game.
GEOFF: Hi, I’m Geoff White. I’m an author and investigative journalist, and I cover organized
crime and technology. Yeah, so, Axie Infinity is not like the games that I used to play when I was
a kid where they sell you the video game and then you go away and you play it and that’s it. Axie
is an online game, as of course lots of them are, and you’re playing against other people online,
which of course lots of games are. But the thing that made Axie different and quite radical,
I think, for some people was that everything in the game was basically for sale. It was a
whole marketplace. So, the way it worked was you have these Axies which are based
on the axolotl salamander. You have a team of Axies, three Axies, and you basically
wrestle them. You fight them against your opponent’s team of Axies, and if you win,
you’re rewarded with Smooth Love Potion tokens which you can use to breed your Axies together
to get them to be better fighting machines. It’s basically a bit like — do you remember those
Tamagochi keyring things you had…? JACK: Yeah, I do; a little digital pet
that you could level up and stuff. GEOFF: Exactly that. It’s like that mixed
with WWF wrestling. So, that’s the idea. This game is hugely, hugely popular.
JACK: Okay, so how — so, I need a team of three of them. How do I get
one of them? What’s the process? GEOFF: You buy. You have to buy the team,
and you can’t — as far as I’m aware — get one. You have to buy a team of three ‘cause three is
the magic number. JACK: Okay.
GEOFF: In order to do this — and this is where it gets interesting with the sort
of cryptocurrency aspect of it. If you have [inaudible] dollars for you, Jack,
you can swap your dollars into ETH, the currency on the Ethereum blockchain, the cryptocurrency.
It’s a bit like Bitcoin. That’s just number two, I think, to Bitcoin, ETH, I think I might say.
You can then take that Ethereum money and you can put it into — transfer it into Axie Infinity,
and then you could use that in-game currency to buy your Axies, to buy Smooth Love Potion. You
can buy land in the game. So, it’s all — the whole game is based on cryptocurrency, and there’s an
internal blockchain within the game that tracks who owns what and who sold what to who.
JACK: I see. I like the ownership aspect of this. You really do digitally own one of these Axies
since it’s all on the blockchain. There’s no way for anyone to take your Axies away from you if
you own them unless they steal your private key. To me, this is interesting because look
at the software world right now. You can’t buy Microsoft Word or Adobe Photoshop. You have to
pay a monthly fee in order to use it. You don’t own a lot of the software or games today if you
have to have an internet connection for it to work. As the meme goes, if purchasing isn’t
ownership, then piracy isn’t theft. GEOFF: Axie Infinity was created by a company
called Sky Mavis who are headquartered in Vietnam. I think the company is registered,
though, in Singapore. This was five guys who had been part of the e-sports scene,
so they’d been around gaming for a very long time. The idea of crypto-based video games
wasn’t sort of radically new. I think CryptoKitties predates Axie Infinity,
from what I’ve read of it. But basically what they did was they built this game and released it,
and in a way they lucked out because they obviously got the benefit of video game
obsession. People became obsessed with this game and started playing it and battling their Axies
together and so on. They also got the benefit of a cryptocurrency boom, because this was
sort of 2019, 2020, and crypto was starting to rise in value quite steeply at that point. So,
people who were into videogaming got into Axie Infinity. But what was really interesting around
the discussion boards around Axie Infinity is you start to see this change where people are
discussing the game and then they start to discuss crypto investments and crypto speculation. So,
suddenly people who are into crypto on the speculative side of it started to see this game as
an opportunity, a money-making opportunity. [MUSIC] So, you’ve got this incredible whirlwind
of obsessive gamers and also obsessive cryptocurrency speculators coming in,
and this game just went up and up in value. I think at one point it was valued at $2 billion,
I think I’m right in saying. It’s astonishing values. The other thing that fed into this was
Covid, was lockdown, so during that period. The game was big in Southeast Asia, particularly big
in Southeast Asia, because that’s where the company was headquartered, and it absolutely
took off, particularly the Philippines. I think 40% of the players, apparently,
were in the Philippines. During lockdown a lot of people lost work, weren’t able to go to work, were
looking around for alternative sources of income, and they started to see that actually they could
potentially play this video game and make money at it. So, you put all these factors together and
you just get this explosive combination that just launched Axie Infinity into the stratosphere, must
to the surprise, I think it’s fair to say, of the guys at Sky Mavis who made it. I don’t think they
were expecting it to be such big of a hit. JACK: Now, because the in-game currency was the
Ethereum cryptocurrency, this allowed for a whole in-game marketplace. You could buy or
sell things to other players with cryptocurrency just directly on the blockchain. Ethereum wasn’t
just for cryptocurrency but there were items on it now, Axies, for instance, and you could buy
one from another person directly if you wanted, without having to go through any game to do it.
How do people make money? Do you understand the complexities of this? Because if you’re
battling someone and you win the battle, do you take money from the other person?
GEOFF: No; the way it would work, as I understand it, is your Axies would become more and more
valuable the more fights they won, and you could actually sell them to other people in the game.
So, you could say, I’ve got this team of Axies. Look, they’ve got a fantastic track record of
killing lots of other Axies. I don’t know actually whether killing was part of it, but winning the
battles. Would you like to buy them off me? Also, there’s a trade in Smooth Love Potions. So, as you
played the game, you got more Smooth Love Potion; you could sell the Smooth Love Potion to people.
You could buy and sell plots of land on Lunacia which is the virtual environment in which the game
is played. So, everything — almost everything was for sale, so the money was sort of being shared
around by trading within the game. JACK: Now, you might be thinking, hold on,
wait a minute. This is an awful idea, to bridge real money into a video game. Well,
you’re not the only one to think that. The video game marketplace Steam has outright banned all
crypto-based games from there. At first glance you might be thinking, oh, that’s because they
don’t want people spending real money on games like that. It can ruin the in-game economy and
it leads to speculative behavior. Also, isn’t it stupid to just buy video game assets like gold
and weapons? But none of those are the reasons why Steam banned crypto-based games. [MUSIC] A
very popular game on Steam is CS:GO. Or, I guess it’s now called Counter-Strike 2. Within Steam
itself there’s a whole marketplace where you can buy and sell in-game Counter-Strike items from
other players for real money. It’s like a giant marketplace on Steam. Thousands of purchases
happen every day. Yeah, you can show up, type your credit card details in, and start buying items in
the game from other players with real money. Steam has built this whole system, so clearly they are
perfectly fine with people using real money to buy in-game items or be speculative in the game or
mess up the game economy. However, when you sell an item, you don’t get the money from the sale.
They give you Steam credits which can be used to buy other games on Steam. But players were like,
wait a minute, if I’m selling this to someone who’s buying it with their credit card,
why can’t I get the money they paid for it? Steam’s like, eh, we really don’t want to
give you money. Game credits are much better for us. So players were like,
you know what? Nobody can stop us from just trading among ourselves. So, player-to-player
sales started happening. But how do you send money digitally? You can’t just give someone your credit
card. It doesn’t work that way. So, players started trading using cryptocurrency, but this
became unsafe. People were sending their money and not getting anything in the trade. So, websites
started popping up saying, hey, we’ll broker the deal for you, and they started acting like
the middle man in trades for Counter-Strike. That went on for a while and Steam was like, alright,
here, we’ll make an API for the marketplace. This allowed secondary marketplaces to let players buy
and sell in-game items with real money. Not only that; a lot of markets allowed you to buy and sell
items with cryptocurrency. So, while Steam has banned crypto-based games, you can actually use
crypto to buy things in Counter-Strike 2 or sell things and get crypto from it. This is all totally
allowed by Steam. Steam could put an end to all this right now if they wanted. They could make
it so players just can’t trade with each other anymore, but they won’t because they make far too
much money from this whole system. So, why does Steam actually ban crypto-based games?
I think it’s because the regulatory landscape is unclear. When you start accepting cryptocurrency,
suddenly you get into these regulations that are very difficult to figure out. And don’t tell me
that Steam bans crypto-based games because it keeps out the trashy, scammy type stuff. Well,
have you seen the game Banana? As I’m saying this, it is the second-most popular game on Steam,
and it’s possibly the world’s dumbest game. You just click a banana, and after a while
you might get a banana for doing it which can be sold on the marketplace, and it’s making
the creator a ton of money since people are buying bananas with real money for no reason.
The banana does nothing in the game. This is ten times dumber than any NFT game I’ve ever seen,
and it’s not even an NFT game. The fact that Steam allows this is kinda breaking my brain, honestly.
I bet there are a million teenagers today who are very fluent at understanding the market
intricacies of V-Bucks or Robux, the virtual currencies for their favorite games. The thing
about Steam credits or V-Bucks or Robux is you can only buy it. You can never sell it. It’s against
the terms of service to trade that for real money, and that kind of frustrates me. It’s kind of like
when you go to an arcade and they make you buy tokens to play the video games there. Video games
can operate just fine on quarters. There’s no need to invent a whole new currency just to play them,
and the currency can only be bought, never sold. It stinks when I come home from an arcade and
there are a few extra tokens in my pocket. These things are worthless except for one place
in the entire world. So, Axie Infinity was built directly on the Ethereum cryptocurrency,
utilizing smart contracts, but they soon hit a problem. [MUSIC] When you play video games,
you want it to be fast. Ethereum transactions were slow, sometimes taking a few minutes to complete,
and the fees on Ethereum were high, often costing $30 in fees just to buy an Axie from
another player. So, to fix that, Sky Mavis, the creators of Axie Infinity,
created a sidechain of Ethereum called the Ronin network. This sidechain was very compatible with
Ethereum so players could move their money in and out between the Ronin network and the Ethereum
network easily. That mechanism of moving money between the two, they named that the Ronin Bridge.
The Ronin network was much faster and had very low fees, like less than a cent, making it much
more ideal for a video game to be played on this blockchain. But for this Ronin network to operate,
there needed to be nodes and validators. Sky Mavis didn’t want to be the only one controlling those
nodes and validators because if they were, they could theoretically control the whole network.
I guess if you have a majority control of the validators, you could manipulate the system if
you wanted. The idea of a decentralized network is that nobody should ever have a majority of
the validators so that it can’t be manipulated. So, they made sure to have people outside their
control also running nodes and validators. GEOFF: You could play on a browser. I think most
people were playing on a phone. It got so popular that there were reports in the
Philippines of people giving up their jobs just to play this game full time. Now, of course,
as soon as that happens and it hits the headlines, you get this rush of people who all think, oh,
I’ll do that. Of course, it became a pylon. People just went for this game,
particularly in Southeast Asia. JACK: So, there’s this very valuable
company with millions and maybe billions of dollars’ worth of cryptocurrency assets
running through it, swapping around, moving fast, moving a lot. This will attract somebody
who wants to steal that money. GEOFF: Inevitably. [MUSIC] As soon as
you start to make scads of money as a video game, somebody tries to hack you, and that’s
exactly what happened with Axie Infinity. JACK: A lot of scammers and thieves flocked to
this game, trying to steal things from other players. Some players’ crypto wallets were
loaded with tens of thousands of dollars of Axie Infinity assets, and scammers were trying hard to
steal stuff from players’ wallets. One common tactic is to get an Axie Infinity player to
connect their crypto wallet to the scammer’s website, maybe by saying something like, oh,
we’re giving away a free, rare Axie. With some cleverly-crafted message, they can trick a
person into giving them access into their wallet, which then the thief can drain everything from
it. Hundreds if not thousands of Axie Infinity players were victim to this type of attack, and I
should say that even though attacks on players and cryptocurrency-based games is very common, it’s
not unique to only crypto-based games. I remember when I was playing World of Warcraft a long time
ago, someone somehow got into my account and transferred all the gold and removable items from
my character into whatever account they had. I got digitally robbed in World of Warcraft. If you hang
out in the Counter-Strike forums or Roblox forums or Fortnite forums, you see people begging for
help every day, saying their account got hacked or their stuff got stolen. There’s a lot of money in
stealing video game assets. It’s crazy. GEOFF: Ideally what you want to do is you
want to go to the source of all the money, the fount of all the money,
which is Sky Mavis’ servers themselves. [MUSIC] So, the hackers targeted one of
the engineering team — and carried out a very, very elaborate — or at least in my opinion,
very elaborate social engineering exercise on this person; offered them a job. Now,
that’s not an uncommon thing for crypto-developers to get. Game developers get poached all the time.
So — a great job for you; a really big salary. Are you interested in talking to us? This employee
said yes, started receiving details of the job, did apparently a couple of rounds of interviews
for the job which I presume was webcams-off, but was interviewed by people for a job that
seemed to exist. Of course, none of this was true. There was no job. This employee of Sky
Mavis was being targeted by hackers who were trying to maneuver them to the point where
they would effectively download malware. JACK: Hm. So, we don’t know how they made contact.
My first thought was Discord. A ton of scammers are on Discord trying desperately to hack into
people’s accounts. But in this case, I’m willing to bet the initial contact was made on LinkedIn.
It’s kind of easy to find developers for Axie Infinity on there to begin with, then it’s only
a few clicks away before you can message one of them, and it sounds like they messaged a developer
offering them a job. So if that’s the case, it’s not so hard to create a fake persona on LinkedIn
to look like you work for some prestigous company, making the whole story more believable. I mean,
who gets job offers on Discord anyway, you know? LinkedIn is the place to go get job offers.
GEOFF: The other thing you can do if you target someone in this way is you can say to them,
hey, for this job we need to know that you can use this particular piece of software. Can you
download it for us or can you click on this link and go to this private server so you can do this
exercise as part of the job application? There’s lots of ways with a job application that you can
sort of trick someone into doing something they wouldn’t necessarily have done, downloading stuff,
clicking on links. So, I find that really — I think that was a really smart way of operating
and one for people to watch out for. Eventually malware gets downloaded by this employee of
Sky Mavis onto their work device. Now, full disclosure, I don’t think Sky Mavis have revealed
how that specifically was done, but you can think of multiple ways whereby you’d be able to convince
someone as part of the job application process to download something. There’s lots of ways to do
that. Effectively, the malware allowed the hackers access to Sky Mavis’ computer systems, and because
they targeted an engineer, you had what Sky Mavis describes as very deep-level access. It wasn’t
like they’d hacked somebody in the HR department and had to work their way over to the development
environment. They were already in. They’d hit the mother lode, effectively, and were already
in at a very deep level inside Sky Mavis. JACK: Yeah, I mean, if you get malware onto a
developer’s computer and then take control of their computer, then you can assume the
role of that developer in that company. You have their access keys, their logins,
their privileged access to the network. GEOFF: [MUSIC] With their deep-level access to
Sky Mavis’ systems, the hackers start scoping out how Axie Infinity works
and how this money is moving around. JACK: I bet they were looking for a central
wallet like cold storage or something where Sky Mavis stores all the keys and has access
to millions of dollars in crypto. But they couldn’t find that. So, the second thing was,
with all this money flowing through the system, was there a way to grab it somehow?
GEOFF: What they realize is — what we’ve covered earlier is there’s this internal blockchain
within Axie Infinity monitoring the transactions between the players. There’s the external Ethereum
blockchain which is effectively bringing in money that people — Ethereum, Ether currency that people
are spending, into the game and then putting it out. So, there’s a conduit through which this
is all happening, and that conduit is a thing called the Ronin Bridge. The Ronin Bridge’s job
is basically — it’s to reconcile what’s going on in the game with what’s going on on this external
Ethereum blockchain. Effectively, the Ronin Bridge is nine computers around the world, and those
computers are looking at all the transactions inside and outside and reconciling the two ledgers
together. So, basically, the hackers realize, very, very smartly, that’s the pinch point.
That’s the conduit. That’s where the money’s going across. If they can control the Ronin Bridge,
they can effectively control the flow of money. Since there’s millions and millions of dollars
inside Axie Infinity, they can control that money. Now, the thing about this is there were nine
computers as part of the bridge. It’s effectively nine — what they
call — validators. Sky Mavis had sort of thought about the possibility of getting hacked,
to give them credit, and they only controlled four out of those nine, which isn’t enough to
give you majority control. So, you can’t just take over Sky Mavis, get control of the bridge,
and take the money out. The hackers had to find a fifth computer so they have five out of nine,
so they’ve got majority control. This is where things go wrong for Sky Mavis. [MUSIC] Sky Mavis
had outsourced the other five validator computers to external companies. They weren’t in control of
them. So, Sky Mavis didn’t hold all the cards, effectively. But one of the companies they’d
outsourced to gave Sky Mavis a temporary access to its validator, and that temporary access was never
revoked. The hackers somehow managed to realize all of this and thought, ah-ha, we’ve got four
computers validating at Sky Mavis. We need a fifth to get majority control. There’s the fifth one;
we’ve still got access to it via Sky Mavis. We’ve got five out of the nine computers,
and guess what? We control the bridge, we control the money, and it’s time to steal.
JACK: Wow. I think the level of knowledge needed to pull this off is quite remarkable. This is not
so simple as opening up a wallet and transferring the funds out. To take over five of the nine nodes
of this sidechain and to know how to operate them in a way that will allow them to steal
money takes a specific skill set. Whoever did this must have had to prepare quite a bit for
an attack like this. It kind of reminds me of that one time my friend went and bought an antique for,
I don’t know, $1,000 and something, and on his way home he stopped for lunch somewhere
and his car got broken into. The thieves stole the loose change in his cupholder. They looked
at that old antique and didn’t think it was worth anything and left it. Whoever was targeting Axie
Infinity knew exactly where to look to extract the most amount of value they could from the system.
They knew exactly where the value was, and I don’t think many of us would know how to work
these controlling nodes even if we could take them over. [MUSIC] But when they took over these nodes,
they got immediately to work setting up an attack which would allow them to transfer as
much out of the Ronin network as they could and as fast as they could directly into the Ethereum
wallets that were ready and waiting. They set up everything, and using their control of the bridge,
deployed a command to transfer the money. GEOFF: They stole ETH, ETH currency, and USDC,
which at the time was valued at $625 million.
JACK: $625 million. GEOFF: Yes.
JACK: I’m trying to think, is there a single cyber-heist that is more than
$650 million? I can’t think of one. GEOFF: I’ll go further from that. I’ve been
a bit circumspect in the book, but I’m being less circumspect the more I go on. I think it’s
the biggest theft of all time, and I want to — I’m gonna add a couple qualifiers to that ‘cause it is
a big statement to make, right? I’m talking about one-off theft. Obviously ransomware was — well,
you know has made billions over time, multiple victims. I’m talking about one victim,
one hit, at the time the theft happened. ‘Cause obviously there’s the Bitfinex hack — you know,
the one that Heather Morgan and Ilya Lichtenstein got sentenced for.
JACK: Oh, yeah. GEOFF: Well, that was — that ended up
being $3 billion, I think. But at the time of the hack, it was $70 million. So, I’m talking about
valuing a crime at the time was committed; a one-off crime, one victim. So, I’ve been
doing — you know, you Google and you Google and you try and find these things, and there’s — the
Isabella Stewart Gardner Museum heist is one of them. So, that was — I think ‘93, was it? They
broke into the museum. They stole artworks. The artworks were valued at $500 million. Now, that’s
often listed as being one of the most expensive heists of all time, and that’s only $500 million.
So, I know I’m out on a limb here, but I do think it’s a serious — if it’s not the number one, it’s
a very serious contender for biggest theft of all time based on one hack, one victim. One crime, one
victim, valued at the time of the crime. JACK: Now, some of my listeners might be shaking
their heads right now and think, no, Jack, none of this cryptocurrency is
real money. This is not the biggest heist of all time. In fact, a lot of articles
which list the biggest heists of all time don’t include any cryptocurrency heists. But the thing
is these thieves immediately started exchanging it for traditional money. So, to me, if you can
swap it quickly and easily for any currency you want, then, yeah, to me, it’s real money.
GEOFF: Yeah, it may start off in crypto and you may turn your nose up at that,
but it ends up in hard dollars and hard dollars that can be used to fund criminal activity,
and some very serious — as we’re going to talk about, some very serious criminal activity.
JACK: Maybe I should have mentioned this earlier, but the reason I’m talking with Geoff about all
this is because he just published a book called Rinsed, which is all about money laundering in the
modern world. I just finished reading it and it sent me down a wild, twisted tunnel into the world
of money laundering. Now, what we’re talking about in this episode is a single chapter of the book,
though. The biggest heist of all time, Axie Infinity, is interesting by itself, but the
thieves are now faced with a staggeringly huge challenge. How do you cash out $625 million in
stolen cryptocurrency? If you sent it all to an exchange, they might not be
able to swap that much, or they might freeze your account and you could lose it all. So,
while they immediately started sending some of it to an exchange, that was only a small amount,
and they needed a big plan for the bulk of it. We’re gonna take a quick break here,
but stay with us because after the break, someone’s going to prison. The news broke pretty
fast — Axie Infinity’s Ronin Bridge hacked; $625 million stolen. Lots of people lost a lot of money
and including Sky Mavis itself, but of course, everyone wanted to know, who did this?
GEOFF: Good question. Obviously it very quickly hit the news this had happened, and in fairness,
Sky Mavis did a rolling blog on what had happened and were filling people in. Of course, because
it’s cryptocurrency and because all cryptocurrency moves across a blockchain which is almost always
publicly available — particularly when the hackers transferred the money out from Sky Mavis,
it was publicly-viewable — people start looking at the wallet addresses to which the money’s
being sent. They start looking at the methodology behind the hack, and very quickly, the name that
pops into the frame is North Korea. JACK: [MUSIC] North Korea. So, North Korea’s
military has something called the Reconnaissance General Bureau. In it are believed to be where
thousand of hackers are trained and tasked with completing military objectives.
This isn’t the first time they’ve been accused of stealing millions of dollars in crypto,
and it’s estimated that they’ve stolen over a billion dollars in cryptocurrency now. I can’t
think of another country where their government is hacking for financial gain like this.
GEOFF: No, that we know of. It’s certainly very rare for nation-state hackers to [inaudible] send
for money. Of course, North Korea’s in this unique situation. North Korea’s unique for a
lot of reasons, but the unique situation that they are under international financial sanctions, have
been for a very long time, have, it seems, largely run out of money or run out of legitimate sources
of money — and so, the accusation is that North Korea’s computer hackers are tasked with gaining
currency by any means necessary, and that’s, from what we know of North Korea, not unusual. Its
diplomats historically have been tasked with not just being diplomats but — you know, can you also
make a bit of money on the side, please? JACK: Hm. But now that I said that out loud that
I don’t know of another country that hacks for financial gain,
I’m reminded of an episode I did with a CIA agent. It was Episode 116, called Mad Dog. In it, a CIA
agent told me he tricked a diplomat from another country to give him information on an upcoming
trade deal between the US and that country. He saw what their bottom line was, the lowest amount that
they would accept in the trade deal, and he gave this information to the US who in turn used that
information to save the US billions of dollars in the trade deal. Is this hacking for financial
gain? Social engineering for profit, maybe? I guess economic security falls under national
security, and countries will go to great lengths to keep their economic security going well.
GEOFF: When you steal cryptocurrency, one of the hazards of this is it’s inevitably going to be on
a blockchain somewhere, and that’s almost never to be — going to be public. So, it’s almost like
you’ve gone into the bank and stolen a whole bunch of bank notes, but they’re all fluorescent yellow
and people can see in your pocket that you’ve got these bank notes. So,
your key task as a cryptocurrency thief is to launder the money, and that’s why I’ve written
a book about money laundering. JACK: Well, hang on a second now. So,
they have 170,000 Ethereum tokens. They need to turn that into dollars so they
can buy whatever. Why don’t they just set up an exchange in North Korea that they can just
send it to and be like, alright, done? GEOFF: That’s a very good point, and one of the
things that people have spoken about is the idea of North Korea sort of setting up a cryptocurrency
exchange. I guess the answer to that would probably be — firstly there’s this idea I
think with all these thefts that are attributed to North Korea that North Korea gets the money back
to Pyongyang and that’s where its destination is. Well, there’s nothing to buy in Pyongyang. There’s
no point in sending it there. Yes, you could set up a cryptocurrency exchange in Pyongyang, send
all the cryptocurrency there, withdraw it in — I think it’s still — the won is the currency they
use. But then you’ve got North Korean currency in North Korea. What are you gonna buy? What was the
point of that? What you want is to ship the money to — I don’t know, you want to buy widgets in
Frankfurt, ball bearings in Frankfurt. You want to pay somebody off in Brazil. You want to get hold
of missile technology secrets in Afghanistan. You want the money mobile, you want it flexible, so,
you want to be able to move it around. Also, $625 million is a huge quantity of money. You’ve got to
take it somewhere where there’s enough liquidity that somebody will buy that cryptocurrency off
you in exchange for cash. Well, for, yeah, money, dollars, pounds, yen, whatever. So,
this was the challenge that North Korea was faced with, if indeed it was they behind the hack,
that they were trying to take this money somewhere that could absorb it and turn it around and give
it back to them in cold, hard currency. JACK: Okay, so North Korea has $625 million
in stolen cryptocurrency, specifically Ethereum and USDC.
GEOFF: Let me just say these are allegations. North Korea denies these allegations, obviously,
being involved in these hacks. JACK: Okay, so it’s supposedly North
Korea. A lot of evidence points to them, but we don’t know for certain. I think it was. Now,
the way these cryptocurrencies work is there’s no way to recover that money. This is real ownership,
as I was saying earlier. There’s no central bank that can reverse the transfer or pull the
money back out. The money is North Korea’s and there’s nothing anyone can do about that ever.
Except, North Korea is under strict sanctions, which means it’s forbidden to do business with
them. On top of that, it’s stolen money, and those wallets were flagged. So, exchanges won’t
simply let them exchange it into cash. What they need is a chop shop. [MUSIC] The only
reason why I know about chop shops is because of playing Grand Theft Auto, and when I was playing
the game and I stole a car and the police were chasing after me, I could take that car into a
chop shop. They’d scratch off the VIN, paint the car a different color, and give it a new
license plate. Then when I got back on the road, I could drive right past the police without them
knowing it’s the same stolen car, since it looks entirely different. But with cryptocurrency,
you can’t hide very well by just transferring the money into a fresh wallet. There’s a big,
glaring transfer displayed publicly for anyone to see. Moving it into a new wallet doesn’t do
anything to hide your tracks. They somehow needed to clean this money so it can’t be linked back
to the money stolen from Axie Infinity. GEOFF: By this point, the wallets into which the
crypto have been transferred — the stolen money from Axie had been transferred into
crypto wallets, and those wallets were flagged as being recipients of crime. The law enforcement had
acted quite quickly and gone around to the major exchanges, the big, legitimate crypto exchanges,
and said, hey, if anybody tries to transfer you money from that wallet there, don’t take
it ‘cause it was stolen from Axie. So, they tried, I think, $60 million dollars’ worth
of exchanges, the hackers, at legitimate, above-the-line, above-the-board exchanges,
and that money all got frozen because of course as soon as the exchanges received the money,
they went, oh, this is the stolen Axie money. Yeah, we’re keeping this. So, the hackers lost
tens of millions of the stolen money because they tried to pump it through the legitimate system,
and the legitimate system just froze it. So, then they needed to find somewhere else. Where can you
go with hundreds of millions of dollars of stolen crypto and just put it in, no questions asked?
That’s what led them to Tornado Cash. JACK: [MUSIC] Tornado Cash? I’ve used Tornado
Cash before. Let me tell you why. Okay, so, I was going for a coffee a while back in my town, and I
noticed they accepted Ethereum cryptocurrency. I was like, hot diggity. People have been donating
Ethereum to my podcast; I’m gonna use it to buy some coffee. So I started to get it going,
but I thought, wait a minute, hold on. No way. This is a bad idea. My donation wallet is public,
so anyone can see where I spend my money, and if they see I spent it on coffee in my town,
that might expose where I live. I go to extreme lengths to keep my private life and public life
separate. So, I need a way to move this money into a personal wallet so I can spend it without people
able to see where I’m spending it. So, what are my options? I could send it to an exchange and
then send it to a fresh wallet, but to use an exchange, I have to give them my personal
details like my driver’s license and stuff, which seems a bit much just to buy a cup of
coffee. Isn’t there a simpler system, one that’s more privacy-focused? Yeah, Tornado Cash.
Tornado Cash is great. You send your money to it, it gets thrown in a pool with a bunch
of other people’s money, and you get sort of a claim ticket. At any moment, you can use your
claim ticket to get your money back out into a fresh wallet. Essentially, this allows you
to transfer your money into a new wallet, but it removes the tracks of where it came from. What’s
great about it is that it’s all automatic. I was telling you about smart contracts before,
where you can add code to the Ethereum blockchain. Money is programmable now. So,
I can see the Tornado Cash code, verify it looks okay, and then get my wallet to interact with it
directly, giving it my money, and getting that claim ticket back. The way Tornado Cash worked
is that they purposely built it so the creators themselves never took control of your money. The
only person who would ever have control of your money is you. The smart contract is programmed
to handle the money, but the creators built it so that they can’t even control the smart contract
anymore. They literally coded all zeroes in for who can control it, which means nobody can.
GEOFF: As the stories have emerged, one of the people who had used this particular mix was
Vitalik Buterin, who, of course, came up with the Ethereum protocol, I think co-developed
it. He said, look, this is exactly what I did. I wanted to donate to Ukraine. I didn’t want to do
it publicly, and that is the hazard of using crypto, is it is public, so I used a mixer
because I want to preserve my privacy. There are good, privacy-preserving reasons to use something
like Tornado Cash, and that’s, I suspect, the reason Tornado Cash was set up, largely,
was for those privacy-preserving reasons. JACK: Okay, so you might be thinking, hold on,
this is just a Bitcoin tumbler, a mixer for money laundering, and there have been lots of them in
the past. Weren’t they all illegal, anyway? Yeah, that’s the thing. [MUSIC] This one was different,
very different. The ones in the past were typically custodial mixers, meaning
someone is actually in possession of your money. If someone put a gun to their head,
they could hand over all your money. These kind of mixers are illegal because the person holding
the money should know whose money they’re holding. Like, if I give you something illegal to hold, you
could be in just as much trouble for holding it as me. Yeah, a bunch of people were running these
mixers and were caught by the police and arrested for running unlicensed money-transmitters,
and the police were able to shut down those services. The difference here is very important.
A custodial mixer is where you give your money to some person to hold for when you want it back,
while a non-custodial mixer — the money is held on the blockchain, not in anyone’s possession,
kind of like if you just stashed your money in a locker somewhere and then you gave the key
to someone else and they got it out. The place that owned those lockers had no
idea what you put in there, so they can’t be held liable for whatever was in there,
kind of like a dead drop. Now, I imagine the makers of Tornado Cash saw that custodial mixers
had been shut down and arrested in the past, and they probably knew full well that a service like
this might be abused by people. So, Tornado Cash developers were like, we have to be absolutely
certain that we’re never in possession of anyone’s money, ever. We can never have custody since those
kind of mixers are illegal. So, it’s only with the invention of smart contracts that they were
able to make a service like this, that they could be completely hands-off, a service that nobody
was operating or running. It was headless. The developers could never touch anyone’s money even
if they wanted. It was coded that way. In no way, shape, or form are they ever in possession of
anyone’s money, and they went to great lengths to prove that. Not only that; they wanted this thing
to be extremely resilient and impossible to be taken down, as they felt that privacy tools like
this were very important to people. Also, a lot of these mixers in the past were
tailored for criminals. AlphaBay, for example, was a darknet marketplace where people could buy and
sell illegal items. Well, the site had its own crypto mixer specifically designed to help you
hide your illegal purchases, and in the world of cyber crime, intention matters. If you are
building something specifically for criminals to conduct crimes with, that’s racketeering and
you could get RICO charges against you. But the developers of Tornado Cash held on strong that
this was a privacy tool. That was their point, and to make that clear, they didn’t hide in the
shadows of the darknet. They were open about their service and made it easily accessible. I mean,
they even had a Twitter account and a normal website which all clearly said this is a way to
have private transactions on Ethereum. So, as you can see, as a person who values my own privacy,
I found this tool to be helpful and important. Decentralization is very fascinating to me,
too. My website, darknetdiaries.com, is hosted on a single server somewhere, but Tornado Cash was
kept up by hundreds of thousands of people running Ethereum validators, and there’s something amazing
and beautiful about that. We can put something on the blockchain and you know it’ll permanently be
there as long as Ethereum exists. GEOFF: You’ve understood exactly. That’s
precisely what it is. At least, that’s what the claim was from inside Tornado Cash. As we’ll
talk about later on, others have cast a lot of doubt on that. But certainly that was the claim,
that Tornado Cash is this headless organization and once you use it, you’re effectively using
an automated machine. It’s like going up to a vending machine, sticking your money in, and
getting the can out. The vending machine’s been forgotten by whichever company was meant
to own it. It just runs on its own. JACK: Well, clearly I wasn’t the only one
to use Tornado Cash. The people who stole the $600 million from Axie Infinity also
noticed Tornado Cash and sent hundreds of millions of dollars to it.
GEOFF: [MUSIC] Now, this has obviously presented a lot of problems for the — particularly the United
States government, because they can see that the money’s gone from — the stolen — the money’s
gone — from Axie Infinity had been stolen and sent to Tornado Cash. They believe it’s North Korea
behind this, but who do you prosecute? There’s nobody behind Tornado Cash at this time. That’s
what they thought. So, it’s like, what do we do about this? So, they did the next best thing,
the US government; they put Tornado Cash under sanctions and basically said, look, this mixer,
this Tornado Cash mixer, is working for the North Koreans, we believe, we claim, and therefore
anybody who interacts with this mixer and sends money to it or receives money, anybody who
interacts who’s in the US — people, organizations, doesn’t matter — they are breaching sanctions as
well. We can’t shut Tornado Cash down but we can freeze it out by saying, you cannot interact with
anybody in the US anymore, and anybody in the US who interacts with Tornado Cash, you’ve committed
an offense and we can come after you. JACK: Sanctions, what? The privacy tool I use
got sanctioned? Hold on, hold on. This does not feel right. Okay, I need some
names. Who created Tornado Cash? GEOFF: Yes, three people, it seems,
created it. They are Andre Pertsev, Roman Storm, and Roman Semenov. They worked for a company
called PepperSec, and I think it’s — as we’ll get into, there’s some legal proceedings around
this that we have to be quite careful about, but I think it’s fairly uncontronversial that they
set up PepperSec and they created Tornado Cash. But the key thing is they created it, they say,
to preserve privacy, and having created it, they got to a certain stage and said, okay,
we now burn our passwords lists, we step back. We have nothing more to do with this. It’s running
on its own, the Tornado Cash DAO. JACK: Oh, it was a DAO. Of course. DAOs are
fascinating. What I’m saying is an acronym, D-A-O, DAO, and it stands for decentralized autonomous
organization, and this is a perfect example of one. [MUSIC] The internet has changed everything
about our lives. You know that already. Every day I get online and I chat with loads of people from
all around the world and I visit websites from other countries, and it never feels like I’m
traveling far away to another country to interact with them. It’s just right here on the screen in
my bedroom, just milliseconds away. The internet has connected us in a way where national borders
just don’t seem to exist anymore. So, if you were to start an online business that exists
only online and there’s no physical product or reason to have a home base — and maybe you start
it with two other people. Like, one person is from Europe, another is from Asia, and the third
is from the US. What country do you establish your business in? Forget it. Why not just make
it an online company not part of any nation at all? Is that possible? I mean, traditionally you
needed to make a company like an LLC or something in order to get a business bank account to do
business with the world. But since this service is all cryptocurrency-based, you don’t need a bank,
and autonomous means the company can continue to operate without anyone controlling it.
Tornado Cash was one of these DAOs. It was decentralized and autonomous. It existed
only online and was capable of operating all by itself. This is another new thing in the world
that didn’t exist ten years ago. These DAOs exist online only. It’s a business that isn’t seeded in
any specific country. Why should it be? If people are getting paid from a DAO, then those people can
just report their income on their taxes and say they’re contractors for that organization. So,
the US federal authorities were mad that hundreds of millions of dollars were stolen and then sent
through Tornado Cash. They wanted to seize the funds and shut down the service. But like I said,
Tornado Cash was built in a way that it was impossible to turn off and they never had
control of the funds ever. So, the only tool the US authorities had to try to stop it was
to sanction it, which, I don’t even think you can sanction an app, a piece of code. I mean,
it’s still there on GitHub for anyone to see right now. So, if it’s illegal, why is it on GitHub?
Code is just words and symbols, so in essence here, they’ve sanctioned a bunch of words that
in a certain combination has meaning? So, can you even sanction a page with words on it? Isn’t there
a free-speech violation in here somewhere? But not only did they sanction the code;
they decided to arrest the people who started it. But what was their intention for starting
Tornado Cash? Because as I said earlier, in the world of cyber crime, intention matters.
GEOFF: It really does, and, well, there’s two sides to this. You can go on the back
of what they’ve said and what their defenders say, which is this was a privacy-preserving
tool. The intention was never to enable money laundering. However, the counter-argument from
the authorities which they’re making very strongly and in court is it doesn’t matter. If you’re gonna
run a money-transmitting business dealing with, as Tornado Cash was, hundreds of millions of dollars,
you are obliged to think about money laundering. You can’t just naively set the thing up and hope
no criminals are gonna use it. That’s not how it works, buddy. You have to obey money-laundering
laws. So, we’ve got arguments on both sides. We’ve got arguments the intention was never
there. We’ve got the argument on the other side saying it doesn’t matter. You’re on the hook for
this if you set up these businesses. As you can tell, I’m being diplomatic about this. A; ‘cause
there’s legal procedures about it. B; also because I hear both sides. I do genuinely hear both sides,
and that’s the thing. It’s a fascinating debate. That’s why it’s a fascinating story.
JACK: Hm, the police are saying intention doesn’t matter here. The act of creating open-source code
and putting it on the blockchain to help make your financial transactions private was illegal because
someone misused their tool. I want to point out here that the US government isn’t clear on whether
cryptocurrency is even money or not. The Commodity Futures Trading Commission, the CFDC, classifies
it as a commodity. The SCC classifies it as a security. The IRS classifies it as property, and
FinCEN, the Financial Crimes Enforcement Network, classifies it as money, which is what requires
people to follow the anti-money-laundering laws. The government has made all this so confusing. I
hate being in this position. I don’t want to take the side of criminals who stole this money,
but because I want to live in a world where financial privacy exists, I feel like sanctioning
privacy tools hurts me. GEOFF: Yes, but the cost of that,
that’s — if you do 100% privacy, you have to protect people you don’t like as well. It’s
a fascinating debate. This is why it goes around and around in my head in the same way it sounds
like it’s going in yours, as well. JACK: Because the money-transmitting rules
they were supposed to follow was KYC, which stands for ‘know your customer’. For them to
operate this legally, they would have had to ask everyone who uses the service for their real name,
identity — upload your driver’s license, tell them your address, and when you do all that,
now it’s not so private anymore. Now creators have to maintain a database and a whole back
end full of people’s personal information. I don’t want my personal information in a
database somewhere just so I can privately buy a cup of coffee. The best privacy tools are the
ones who know nothing about who I am. When the financial system becomes a surveillance system,
we start having big problems. [MUSIC] Look at China, for example. They have this social credit
system where if you do things the government doesn’t like, they can restrict what you buy.
They can also see everything you buy and make judgements about your character based on it,
restricting other areas of your life, or even targeting you as a problem citizen. A government
that is watching your every purchase is not encouraging of a free society. Let’s look at some
legitimate use cases for why you’d want to use Tornado Cash to hide your transactions. You heard
me say that I like to have this buffer between my public life and my private life. The internet
is a big, old, dangerous place, and if you don’t believe me, listen to the previous 146 episodes
of this podcast. It’s important that we secure our stuff and take our privacy seriously.
Also, imagine going to buy something from someone and as soon as you give them the money,
they can look to see how much money is in your bank account and all your previous purchases.
This is how Ethereum works by default, so we need a way to shield our purchases from
the rest of our transaction history. You heard how Vitalik, the creator of Ethereum, wanted to
donate to Ukraine but wanted to do so privately without anyone knowing. There’s another reason;
he’s a public figure. He wants to keep his political activities to himself. There are
non-profits that I know of who go to great lengths to keep their donors private because donors don’t
want the public to know what causes they’re giving towards and don’t want any extra solicitation from
people asking them for more money. But I keep thinking about stories of people living in
oppressive regimes; China, Russia, Iran. If you live there and speak up against the government,
you could easily go to jail. These governments want strict control over their citizens,
so monitoring financial transactions is crucial to keeping a strong grip on them. So, dissenters
and activists in these countries absolutely need a way to send and receive money in a private way
to support their cause and educate people in the atrocities of their own government. Their
life depends on private financial transactions. Churches and charities don’t care if you deliver
them a big bag of cash as an anonymous donor, and it’s none of anyone’s business if I want to donate
anonymously. I want the same thing for digital transactions. I think taking down privacy tools
like Tornado Cash hurts regular people. GEOFF: Which was exactly the basis on which
the crypto-campaigners sued the United States Treasury and Janet Yellen individually after the
sanctioning of Tornado Cash. This decision to sanction Tornado Cash went down very,
very badly with large swathes of the crypto community, it has to be said,
for exactly the reasons you’ve outlined. One of the key arguments and a fascinating argument is to
what extent are you responsible for the downstream effect of code that you create and make available?
The people who saw this decision by the Treasury, the US Treasury, to sanction Tornado Cash, said,
well, you can’t sanction code. You can sanction the person that misuses the code. You don’t — if
somebody gets stabbed, you don’t prosecute the person who made the knife. You prosecute
the person who did the stabbing. So, that was the argument on which the US Treasury — one of
the arguments on which the US Treasury was being sued. The other line of argument was that code,
as you said, is freedom of speech and freedom of speech is constitutionally protected. Those cases,
by the way, the attempts to sue the Treasury over its decision on Tornado Cash, got rejected,
have not done well, but are being appealed, as far as I’m aware, at the moment. So,
they lost in the first — at least one round, maybe two rounds, but they’re continuing that campaign
because they argue exactly the same as you’re saying which is this is code. You don’t prosecute
code because if you do, you dampen freedom of speech. You stop people inventing code. There’s
a chilling effect. That’s the risk here, and that argument’s still playing out in the court.
JACK: I want to just take a step back here and note that this story wasn’t possible ten
years ago. This is such a novel, new world we’re in. Money used to only be physical,
but with credit cards it’s turned virtual, and with everything being online today,
we need digital money. Money used to be controlled by governments, but now with cryptocurrency, it’s
controlled by the people. It’s like we’re in the middle of a major revolution here. Money is power,
and the governments are losing their power as cryptocurrency becomes more widespread. So,
of course they’d want to put up a fight against it. Now with smart contracts and DAOs,
businesses can be fully-autonomous and always online? How crazy is that that a company can
exist and make money and act as an online service and it doesn’t need to be maintained or controlled
by anyone? This is an entirely new kind of problem for the US government to deal with,
and they don’t really have a good way to combat against it other than sanctioning the code.
If you aren’t familiar with how sanctions work, it means the US Department of the Treasury’s Office
of Foreign Assets Control, which is OFAC, has declared that you are forbidden to interact with
Tornado Cash. If you do, you might get arrested, but it also means your money may become frozen
if you send it to an exchange. Typically when I buy things or go online, I don’t ever think
about whether or not I’m violating sanctions. For instance, if North Korea is sanctioned,
I don’t expect North-Korean-made goods to be in my supermarket where I could buy them and break
sanction codes or something. I assume the shop owner knows not to buy sanctioned items to try
to sell them to me. So, it’s completely off my radar. But here’s a situation which I think is
the first time ever that an online application is sanctioned. This is unprecedented. So,
now I don’t know how to navigate this world. Am I supposed to check the sanctions list every time I
go online, visit a website, buy something, use an online service? This breaks my brain.
GEOFF: You are clearly not the only person who feels this, because in the wake of the
US government sanctioning Tornado Cash, somebody clearly felt even more — felt very concerned by
this and very put out by it and thought the whole thing was ridiculous, this idea of sanctioning.
So, they set up a stunt, which is another bizarre wrinkle to this story and an intriguing one. So,
the thing about Tornado Cash is even though the government — the US government sanctioned it,
it’s still up and running. You can still use it. It’s code on the internet. The website went down
but that doesn’t matter ‘cause the protocol — you can still send money to the protocol,
effectively, and it will do what it’s programmed to do and effectively mix the money and anonymize
the money. So, the thing about that is if I know, Jack, your Ethereum wallet address,
I can use Tornado Cash to send you money, and there’s nothing you can do about it. It just
gets sent to you automatically. So, someone somewhere — we still don’t know who did this,
and I’m waiting for the day, actually, Jack, when they turn up on your podcast.
Somebody took $50,000 and started randomly sending it in tiny bits, tiny, tiny amounts, to
anybody who was famous who had an Ethereum wallet, including Jimmy Fallon, the comedian Jimmy Fallon,
Shaquille O’Neal, basketball star Shaquille O’Neal. They started receiving — and of course,
it shows up on the blockchain. You can’t hide it ‘cause you see Shaquille O’Neal’s address and you
can see it’s received money from Tornado Cash. That’s all logged. So, technically, I guess you
could argue Jimmy Fallon and Shaquille O’Neal have breached sanctions, are sanctions dodging,
or — and I guess you could say they should be prosecuted for that. But the whole point of
this exercise was to show how ridiculous it was that anybody, even famous people who have done
clearly nothing wrong, can then, as a result of this sanction of Tornado Cash, get implicated in
sanctions-busting. The idea was to illuminate how ridiculous this was. So, I don’t know what Jimmy
Fallon and Shaquille O’Neal have done about that, but it’s tricky. It was a fascinating
stunt that emerged as part of this. JACK: So, North Korea sent about $450
million worth of crypto to Tornado Cash to try to mix it.
GEOFF: There’s cryptocurrency-tracing companies who claim they left it in for about four weeks
and then extricated it. What we don’t know, of course, is who it went to thereafter. So,
you can — with mixers, and particularly when you’re mixing a huge amount like $450 million,
there are companies that track crypto, and one of the things they do with mixers is they look
at the amount going in and the amount going out. Now, you can’t link — this cryptocurrency payment
is linked to that one going out, but you can see the volume. You can see the amounts going in, the
amounts going out. So, I think that’s what they’ve done, is they’ve looked and gone, look, $450
million goes in. We can look at the outflows. Sure enough, four weeks later, $450 million comes out,
to put it in very simple terms. So, that money is now somewhere in cryptocurrency wallets.
The other interesting thing is, well, then who do you take that to to cash out? You’ve got to say to
somebody, right, here’s $450 million which came from Tornado Cash; don’t know where else. Could
you transfer that and change it into pounds or dollars or yuan or whatever? There are people out
there who will do that no questions asked. They’ll take a big cut. But doing that to $450 million,
you’ve gotta have some brokers that have got some serious, serious liquidity on their hands to be
able to change that. So, the theory, I think, from some people, is that there’s a bit of a glut now
of stolen money that the North Koreans are accused of stealing that they’re trying to cash out but
they can’t cash out quickly enough. There’s nobody that can — who can buy it off them for the $450
million or whatever they’d need. So, that’s where that’s ended up, all that money.
JACK: I guess a chop shop wouldn’t even work here because it’s more like you’ve
stolen a giant bus and no matter what color you change it, you’re going to look like a giant bus
coming out the other side. GEOFF: Yeah, yeah, exactly. So,
ideally you want a chop shop that can convert your big, yellow bus into a bunch of tiny, little
smart cars or whatever. Just going back, as well, this idea that Tornado Cash was leaderless is now
being thoroughly challenged in the courts. The first thing that happened was a guy called Andre
Pertzev was arrested in Holland and accused by the Dutch government of running Tornado Cash. Roman
Semenov is also indicted by the US government. He’s believed to be in the Russian Federation,
so he hasn’t faced trial. I’ve tried to contact Roman Semenov; I haven’t heard back from him.
Subsequently, after the sanctioning of Tornado Cash, the US government charged Roman Storm who’s
in the US and is, I think, currently being tried and is in prison. Again, a fascinating
trial. The same arguments are coming up in his trial as we’ve talked about,
people saying, look, he did not run this. He was trying to preserve privacy. That’s why he
set it up. Now, going against that idea that these guys didn’t ‘run’ — in inverted commas — Tornado
Cash, is a slightly inconvenient fact which is that according to the US government, they owned a
lot of the voting tokens and crypto tokens inside Tornado Cash. So, the way this works is Tornado
Cash is leaderless. It’s done by vote. Any changes to Tornado Cash get done by vote using tokens. I
think part of the US government’s argument is, well, hang on, a lot of those tokens were in
the hands of these three individuals. So, they may say they didn’t have control, but actually,
we think they did. Also, they say that they were still making money out of Tornado Cash. So, all
this leads to trying to knock down this argument the defendants have which is that, oh, we didn’t
run it. The US government is saying, no, you did run it, and here’s the evidence why.
JACK: So, the guys who started Tornado Cash — two have been arrested and in May of this year,
the first verdict came in. Alexey Pertsev was tried in the Netherlands, and the judge found
him guilty and sentenced him to five years and four months in prison. The cops took his Porsche
and €1.9 million in cryptocurrency. The press statement from the Netherlands government says,
quote, “Tornado Cash is not a legitimate tool that has unintentionally been abused
by criminals.” End quote. Not a legitimate tool. In fact, the judge said specifically
he could not find any legitimate use for this tool, as if privacy itself is a crime.
GEOFF: What’s fascinating about this is it all starts with the hack on a video game to do with
salamanders, and it ends up in this kind of epic battle royale over freedom of speech and privacy.
Yeah, I find it really, really, fascinating. It’s almost like the kaleidoscopic story. You look into
it and it’s got everything in it. JACK: Yeah, we’ve gone all over the
road here, haven’t we? GEOFF: [LAUGHING] How are you
gonna edit this one down? I’ve no idea. Mate, I do not envy you that task.
JACK: Another way to look at this is that the feds are saying that the developers of the tool are
responsible for how users use it, and that’s a bit crazy, if you ask me. It’s like saying a lighter
company is responsible any time someone uses their lighter to commit arson, or a drone-maker
is responsible any time someone uses their drone illegally like spying on people, flying in the
wrong airspace, or dropping a bomb on someone. Or, it’s like saying a VPN provider gets arrested,
shut down, sanctioned, because some of their users went online and did something illegal. Or,
my goodness, is an encrypted messaging app responsible for people doing criminal activities
on it? We know criminals use iPhones. Apple knows criminals use their phones. In all these cases,
the tech itself is neutral and it’s up to the user to use it responsibly. Governments have
never faced anything like this before and they simply have no precedent to act on here, and in my
opinion, they’re just drawing really fuzzy lines arbitrarily. They can’t even come to a consensus
on whether cryptocurrency is money or not. GEOFF: The worst example you could possibly think
of, maybe with the exception of child sexual abuse, one of the worst examples you could
think of would be a country using this kind of technology to get nukes. Oh yes, we’ve got that.
So, it’s almost like your privacy-defending hat, your privacy-defending head, is being put to the
most extreme test. It’s like, you want privacy; right. What about North Korea and nukes? It’s
almost like that’s immediately what’s happened, is it’s gone to — you know when you’re arguing
with somebody and they just go to the most extreme example of comparing it to Hitler
or whatever. It’s like that’s happened. Now it’s North Korea. What are you going to say now? It’s,
yeah, fascinating, genuinely fascinating. JACK: Okay, I don’t buy that argument. Why?
Because all this happened and they didn’t catch the real criminals here. In fact,
I think even if they implemented KYC, North Korea would just have used some fake ID and it wouldn’t
have helped catch them or slow them down at all. North Koreans are still on the loose with their
fresh and clean $400 million, and they’re the real criminals here. Go after them. It’s crazy
that this story starts with someone stealing hundreds of millions of dollars, and the people
who end up in prison are the privacy advocates. As I’m researching all this, I had to refresh exactly
what does money laundering mean. The act of money laundering is to hide the cash you have that was
involved in some illegal activity, stolen money or drug money or something like that. Me trying
to hide my transactions isn’t a crime. It’s only a crime if I’m trying to hide criminal activity. By
the way, Tornado Cash, despite being sanctioned, is still up and running, because that’s how it was
designed, fully autonomous and decentralized. In fact, there’s YouTube videos out there that
explain how to still use Tornado Cash despite it being sanctioned, basically showing you how
to get around sanctions. Videos like that surely should be illegal, right? It just makes me wonder
if these sanctions have any teeth at all. If you ever hear of anyone who gets arrested for
violating the Tornado Cash sanction, please tell me. I would love to know, because what’s the point
of all this if the government isn’t going to enforce the sanction at all? Because it almost
feels like the government is powerless here. It has no ability to stop or control cryptocurrency
or from people using apps like this. This is what permissionless money is like, and I don’t see any
evidence that the government is even trying to enforce sanctions. The sanctioned code is still
there on GitHub. YouTube happily hosts videos on how to avoid sanctions and still use Tornado Cash.
What is happening here? Just a month ago, the SCC approved the Ethereum ETF. This means you
can buy this stock on the regular stock exchange and they’ll buy ETH for you. It’s a way to invest
in Ethereum without actually holding Ethereum. So, there’s this wallet out there which holds
all the ETH from this ETF. Well, guess what? As soon as the internet figured out which wallet
is holding the money for the ETF, someone sent a whole ETH token worth over $3,000 through Tornado
Cash and then to the ETF wallet, which in my opinion means the wallet is now violating
sanctions and can no longer buy or sell on an exchange. They did it to protest these sanctions,
to show that there’s absolutely no way to enforce this. I guess this means Tornado Cash
won. There’s no way to stop it or to stop people from using it. So, today, there’s still millions
of dollars flowing through Tornado Cash. GEOFF: It’s gone down. Don’t get me wrong,
the amount it’s processing has gone down, and therefore it makes it a less efficient mixer. You
want your mixer to have lots of liquidity, lots of volume going through. The less it’s used, the less
efficient of a mixer it’s going to be. However, it is now a criminal mixer. So, it’s a sanctioned
mixer, according to the US government, and so, anybody who uses it is gonna be a crook. What
that means, of course, is if you use Tornado Cash, you’re gonna really struggle to send the money
onwards, ‘cause whoever sees money coming at them from Tornado Cash is gonna go, no way I’m going to
accept that, unless it’s somebody who doesn’t care about dealing with sanctioned entities, in which
case you’re in a slightly murky world. JACK: It is a very murky world, because let’s say,
hey, I’m selling something online and someone’s like, I’ll buy it, and they send me the
cryptocurrency that’s been mixed through Tornado Cash. Am I supposed to say, whoa, wait a minute,
before you send me the money, let me analyze your wallet to make sure it doesn’t have any
sanctioned crypto in it. This is bonkers. This is like running the serial number on every dollar
bill you ever get to see if it’s ever been used by someone who’s been sanctioned in the past. That
would be a nightmare to have to do, yet that’s what I feel like we have to do from now on. Yeah,
so, suddenly I’m wondering why the US is even involved, right? Axie Infinity
is based in Philippines, so I could see the Philippine police being upset.
GEOFF: Vietnam. JACK: Oh, Vietnam. Okay, so I could
see the Vietnamese being like, alright, we gotta sanction this ‘cause we don’t have any other way,
right? Then you’ve got the creators of Tornado Cash. They’re not US-based, are they?
GEOFF: Yes, Roman Storm is based in the US, but actually at the point where they sanctioned it, I
don’t think that’d had been confirmed. Look, with sanctioning — sanctioning is a really interesting
power in that basically any time money transfers across the US, the US can exert control in terms
of sanctions. So, it’s extremely difficult to avoid if the US government wants to go after
you on sanctions. It’s extremely difficult to avoid. That’s the US government’s argument,
is that there would be US users using this service. Money transactions would have gone across
the US territory. Also, as far as I’m aware, sanctions — the sanctions-dodging accusations
that the US puts at the foot of North Korea gives the US government huge scope to go after it around
the world. Wherever North Korea tries to dodge sanctions, it seems the US government can go with
its sanctions legislation.