Ethereum: Tornado Cash Hit But Didn’t Sink

Placebo effect for regulation? – The year 2022 has been the year of many innovations in the ecosystem cryptocurrencies. It was also the year of regulations. Thus, we have seen in particular Office of Foreign Assets Control (OFAC) imposes sanctions against Tornado Cash. Have these sanctions been effective?

OFAC v. Tornado Cash

Early last August, the Tornado Cash protocol was in the spotlight. In effect, The US Office of Foreign Assets Control has blacklisted the protocol.

Thus, the American organization accused Tornado Cash of facilitating the laundering of more than 7 billion dollars. In response, OFAC decided to issue sanctions against the protocol and entities that interact with it.

Soon, many US-based crypto services moved to censor the protocol. This censorship was then extended to Ethereum blocks as well, with application of OFAC measures by many block producers.

OFAC Compliant Block Allocation in Ethereum.

>> Don’t trust platforms to hold your cryptos? Ledger has the solution (commercial link) <

Are OFAC Sanctions Effective?

On January 9, the company chain analysisspecialized in chain data analysis, published a survey aiming to measure the effectiveness of sanctions imposed by OFAC.

“We’ll look at how the US government’s cryptocurrency sanctions strategy has evolved over time, examine the types of entities it has sanctioned so far, and analyze the impact of these sanctions on the entities themselves and the broader ecosystem. wide range of crypto crime. »

More and more sanctions and sanctions

As a first step, Chainalysis tried to make a history of sanctions. To do this, the company has compiled data since 2018, the date of the first measurements released by OFAC.

Thus, we can see that the number of sanctioned addresses and companies has steadily increased since 2018. However, it is important to note that these actions remain relatively anecdotalwith only about ten entities sanctioned in 2022 for a total of about 350 addresses.

Number of entities and addresses sanctioned by OFAC.
Number of entities and addresses sanctioned by OFAC.

In 2022, the top three entities targeted by OFAC were:

  • Hydradarknet market;
  • Tornado Cashdecentralized mixer;
  • GarantexRussian decentralized exchange.

What impact have these sanctions had?

However, OFAC remains an American organization, therefore the sanctions applied do not necessarily have the desired effect on a global scale.

So, Chainalysis congratulated to determine the real impact of these sanctions analyzing on-chain activities related to sanctioned entities as OFAC places them under its purview.

“Data in the chain shows that each of the three sanctioned services has been affected differently. »

Volumes on the 3 platforms, before and after sanctions.
Volumes on the 3 platforms, before and after sanctions.

As we can see from the graph above, Sanctions against Hydra seem to have paid off. Indeed, cryptocurrency transfers associated with this platform crashed after the sanctions were imposed.

For its part, the Tornado Cash mixing protocol also recorded a noticeable drop in activity following the implementation of OFAC sanctions. Thus, the protocol recorded a volume ranging from 5 to 10 million dollars before the implementation of sanctions. After these, the protocol saw its volume collapse, so it rarely exceeds $5 million.

Therefore, the sanctions imposed by OFAC appear to have had a moderate impact on Tornado Cashcertainly reducing the volume, but much less significantly than in the Hydra market.

“As a global service, Tornado Cash is likely to have a larger number of users who could face consequences for violating US sanctions or be disqualified from using other services if their wallets show exposure to Tornado Cash after its definition. »

Finally, the decentralized exchange platform Garantex did not back down in the face of OFAC sanctions. It even registered an explosion in its volume after the announcements of the American organization.

Bottom line: a half-hearted victory for OFAC

As Chainalysis points out, OFAC’s reach remains limited and its sanctions do not always have the intended effect.

For example, the sanctions allowed the Tornado Cash site to be taken offline. Consequently, it has become much less accessible, effectively reducing its audience. However, under the hood Tornado Cash consists of unstoppable smart contracts. As a result, it can still be used regardless of the implementation of sanctions.

“This suggests that sanctions against decentralized services act more as a means of discouraging the use of the service rather than shutting it down altogether. In the case of Tornado Cash, these incentives appear to have been powerful, as its inflows dropped 68% within 30 days of its designation. This is even more important because Tornado Cash is a mixer, and mixers are less effective at laundering money the less funds they receive. »

For its part, the Ethereum community takes the censorship practiced on its blocks seriously. In this way, the Flashbots project, at the origin of this censorship, has unveiled some ideas to mitigate this phenomenon.

In crypto, do not save carefully! So to keep your crypto assets safe, the best solution is still a personal hardware wallet. In Ledger, there is something for all profiles and all cryptos. Don’t wait to put your capital in security (trading links)!

Leave a Comment