The New York Federal Reserve Bank has released a report on the impact of sanctions on the cryptocurrency mixing service “Tornado Cash.”
Tornado Cash was sanctioned by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) in August 2022 for its involvement in money laundering activities.
According to the report, the usage of Tornado Cash significantly decreased after the sanctions were imposed but gradually started to recover. The report also highlighted that the protocol value and usage of Tornado Cash remained significantly lower post-sanctions, indicating a “persistent impact” on its value and usage.
The report also noted that Ethereum whales complied with the sanctions to some extent, although the level of compliance was somewhat low. Additionally, the proposers could have chosen to censor blocks that did not comply with the sanctions, but there was little change in the actual implementation.
Furthermore, the report revealed a sharp decrease in the total amount and volume of transactions through Tornado Cash during the measured sample period, with a single entity handling most of the funds transferred through the mixer.
The report suggested that the observations made shed light on the vulnerability of Ethereum’s censorship resistance, indicating a level of concentration along the settlement chain and a high dependency on a few actors to facilitate Tornado Cash transactions.
Tornado Cash is a service that anonymizes the transaction history of multiple users’ cryptocurrency trades by mixing them, raising concerns about its use in money laundering activities. Last year, the Lazarus group used Tornado Cash to mix assets obtained through cyberattacks, making it difficult for authorities to track.
In response to these concerns, OFAC sanctioned Tornado Cash in August 2022, blocking assets and interests for individuals associated with the North Korean government who provided substantial support through the service. This led to U.S. users being unable to use Tornado Cash, with their assets frozen.
In light of these sanctions, six Tornado Cash users, including two employees of the cryptocurrency exchange Coinbase, filed a lawsuit against the U.S. Department of the Treasury. In September of the same year, Coinbase announced its support for the lawsuit challenging the sanctions imposed on Tornado Cash.
Alexey Pertsev, co-founder and developer of Tornado Cash, was sentenced to 5 years and 4 months in prison in May for conducting $2.2 billion in money laundering through the cryptocurrency mixing service.
The report’s findings and the ongoing legal battles surrounding Tornado Cash highlight the complex regulatory landscape surrounding cryptocurrency services and the challenges they face in ensuring compliance with anti-money laundering laws and regulations.
