Did Imposing Sanctions on Tornado Cash Have an Impact?
Sanctions are a means of exerting influence through the U.S. dollar in order to mitigate activities that the U.S. government deems harmful, such as financing terrorist groups or supporting rogue nations through activities like money laundering. According to a report by the New York Federal Reserve, sanctions against Tornado Cash, a cryptocurrency mixer, did indeed have an effect on its usage.
The central question surrounding Tornado Cash revolves around the right to private online transactions and the role of mixers in preserving this right. Another question, albeit secondary, is whether these services are truly censorship-resistant, as some proponents claim. The New York Federal Reserve examined the impact of the Office of Foreign Asset Control’s sanctions on Tornado Cash, which were imposed in 2022.
When an individual or entity is sanctioned, the Office of Foreign Asset Control prohibits any U.S. persons from engaging with the sanctioned party. After Tornado Cash was initially blacklisted by OFAC, its usage plummeted by around 90%, as reported by TRM Labs in October 2023.
However, in the two years since the sanctions were imposed, usage has gradually recovered to some extent, according to the NY Fed’s paper released on Wednesday. The report noted that while volumes and transaction diversity for larger Tornado Cash pools never fully returned to pre-sanction levels, there has been a recovery in the usage of smaller pools, suggesting continued interest from retail users.
Interestingly, Tornado Cash transactions have been included by block proposers but excluded by block builders. The paper suggests that sanctions compliance became more prevalent after an August 2023 court ruling that recognized Tornado Cash as an entity under OFAC’s definitions. Additionally, the non-compliant entities are predominantly driven by ideological concerns related to censorship-resistance.
The paper highlights the significant reliance on a limited number of builders to facilitate Tornado Cash transactions, which it deems as indicative of Ethereum’s susceptibility to censorship. As a result of these developments, the privacy functionality of Tornado Cash has deteriorated relative to its pre-sanction state, with a decrease in transaction volume and the number of unique wallets utilizing the mixer over the past two years.
Furthermore, the paper reveals that blocks containing Tornado Cash transactions generate lower fees compared to those without, indicating that validators processing such blocks may be motivated more by philosophical reasons rather than pure profit-seeking.
As regulators worldwide scrutinize mixers due to concerns over their potential exploitation by groups like Lazarus, the overall paper provides insights into this increasingly monitored sector.
(Original text adapted and made unique)