- Exchange Dydx has unbanned accounts it accidentally banned in the wake of the Tornado Cash affair this week
- The exchange had banned a plethora of addresses that had used Tornado Cash in the past
- Dydx has now said it will tweak its compliance parameters, within reason
The fallout over the sanctioning of the Tornado Cash mixing service continued yesterday as derivatives protocol Dydx blocked user accounts that had previously interacted with Tornado Cash, including accidentally blocking some that weren’t. Dydx was the darling of the crypto world when it launched in September 2021, but this latest move has been met with horror by those same people who were lauding it from the rooftops. Dydx said in a statement that it has been forced to act on advice from its compliance provider, although it was at pains to remind users that it “does not have the ability to seize customer funds”.
“Open” Exchange Bans Addresses
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash on Monday, alongside a number of Ethereum addresses that had used the service to launder illicit gains, leading to consternation from many in the cryptocurrency community. This consternation deepened when users of Dydx, which markets itself as an “open” exchange based on Ethereum, began reporting that their wallets were being prevented from using the exchange.
Dydx took to Twitter and issued a concurrent blog post yesterday to explain why it had blocked some addresses in the first place, and how the practice had extended beyond its boundaries. The project explained that it has “long utilized compliance vendors to scan and flag accounts on Dydx’s hosted matching engine that have funds associated with vendors potentially dealing in ransomware, malware, child sex abuse material, known criminals, and sanctions lists published by the global community” and that it “recently became aware of a significant increase in accounts flagged by our compliance provider that were subsequently blocked by Dydx.”
Many of these accounts, the exchange explained, were blocked because a certain portion of the wallet’s funds were associated at some time with the freshly sanctioned Tornado Cash, even though these were often immaterial amounts. This “sudden influx of flags” led to Dydx suspending them, despite acknowledging that “often such users do not realize the origin of the funds transferred to them during various transactions prior to interacting with our platform”.
Users React With Shock
The action of the platform surprised many, who felt that decentralised exchanges shouldn’t be able to do that sort of thing:
Nothing is truly decentralised as the ELITES don’t like what they cant see! and sadly enough you all fall in line! It was okay when @VitalikButerin used the service when sending money to Ukraine because he didn’t want his identity confirmed now its no good? Not using dydx anymore
— Elias 🇦🇺 (@CryptoEdji) August 11, 2022
if you think you can decide which accounts to “close”, then you are no better than central exchanges
— moremore (@viktori89151459) August 10, 2022
Doesn’t instill much faith in dYdX switch on/off accounts like a tradfi bank
— Rolipony (@rolipony) August 11, 2022
Dydx says that it has now “made adjustments, within the limits of our compliance policies, that have unbanned certain accounts” and added that it will “continue to make efforts to limit flagging and track this issue moving forward.”
Despite Dydx promising that it cannot control user funds, it’s clear that many have been labouring under a misapprehension regarding its level of decentralisation, which could see some users leave and never return.
