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Sanctions effect

The narrative

As an analyst, I can share that a report published by the Federal Reserve Bank of New York on Wednesday revealed my findings indicating that the implemented sanctions against Tornado Cash indeed impacted the platform’s usage.

Why it matters

Obviously the big question around Tornado Cash is whether people have the right to transact privately online and how mixers fit into this right. Kind of a secondary question is whether these services are censorship-resistant, as some in the industry have claimed. The New York Federal Reserve took a look at the effect of the Office of Foreign Asset Control’s 2022 sanctions against Tornado Cash.

Breaking it down

When a person or organization is placed on a sanctions list by OFAC (Office of Foreign Assets Control), it means that any individuals or entities who are U.S. citizens, regardless of their location, residents of the U.S., or entities with ties to the U.S., are prohibited from conducting transactions or engaging in activities with the sanctioned party. For example, after Tornado Cash was initially blacklisted by OFAC, usage dropped significantly, as reported by TRM Labs in October 2023.

After initially being imposed, usage has somewhat recovered over the past two years, as stated in a report published by the New York Federal Reserve on Wednesday.

The report mentioned that although larger Tornado Cash pools haven’t completely regained their previous activity levels following sanctions, there has been a return of activity in smaller pools, suggesting that retail users still find the service appealing.

As a researcher delving into this topic, I found an interesting discrepancy: Proposed blocks contain transactions linked to Tornado Cash, yet these transactions seem to be omitted by the block constructors as per the paper’s findings.

You can read the paper at this link or my initial write up at this link, but I wanted to highlight two details the paper emphasized.

1. The initial point I’d like to highlight is that the impact of adhering to sanctions was significantly noticed following a court ruling in August 2023, which classified Tornado Cash as an entity according to OFAC’s terms.

“The ruling seems to have prompted large builders to adopt a cooperative approach, providing support for the theory that clear regulations significantly influence cooperation decisions. In the case of Tornado Cash transactions, we observe that two key players account for more than half of the non-cooperative blocks, suggesting vulnerability in Ethereum’s censorship resistance due to reliance on a limited number of builders.” (Note: I combined the two sentences into one for clarity and paraphrased some parts to make it easier to understand.)

The report stated that Tornado Cash’s privacy features have noticeably decreased compared to earlier periods. This decline is due to a decrease in transaction activity and a reduction in the variety of wallets interacting with the mixer service during the last two years.

Moreover, the study found that blocks with Tornado Cash transactions tend to have lower transaction fees compared to those without such transactions. It was suggested in the paper that validators who process these particular blocks might be driven less by financial gain and more by philosophical motivations instead.

The overall paper is worth a read, as mixers increasingly draw scrutiny from international regulators over their potential uses by groups like Lazarus.

Stories you may have missed

This week

This week

Elsewhere:

Should you have any ideas, queries, or feedback regarding the topic for discussion next week, or anything else you’d prefer to share with me, don’t hesitate to send an email to nik@coindesk.com, or reach out to me on Twitter at @nikhileshde.

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See ya’ll next week!