A study from the Federal Reserve Bank of New York examines at how sanctions have affected Tornado Cash, the cryptocurrency mixer that the U.S. Treasury Department put sanctions on in 2022. Even in decentralized finance (DeFi), the study says that sanctions work.
On August 8, 2022, the Treasury’s Office of Foreign Assets Control (OFAC) banned accounts that were linked to Tornado Cash because it was used to launder a lot of money by hiding crypto transactions. This was the first time that a computer program was given the green light.
The study shows that Tornado Cash use dropped a lot after the sanctions, but it slowly started to rise again. As a response, the crypto community blocked Tornado Cash on a number of exchanges and platforms. However, industry groups supported the protocol.
Tornado Cash Comeback Continues
Ethereum’s consensus method changed from proof-of-work to proof-of-stake after the sanctions. On Ethereum, builders send transaction blocks to proposers, who then check them for errors. The study says that most users followed the rules, but Major builders did not follow them as closely.
People who built blocks that broke the rules did so because they believed in them, not because they wanted to make funds, and proposers’ actions did not affect much even though they could filter out blocks that didn’t follow the rules.
The study shows how weak Ethereum’s defenses against censorship are. Even though Ethereum was designed to be decentralized, the network is very centralized along the settlement chain and depends on a few players to include transactions.
Tornado Cash is still going strong and has seen a comeback this year. In May, Alexey Pertsev, who worked on the protocol, was found guilty of moving funds to the Netherlands. The U.S. Justice Department has also charged Roman Storm and Roman Semenov, two coders, with conspiracy to launder money, breaking sanctions, and running a money-transfer business without a license.
