The US Department of the Treasury slapped Tornado Cash with sanctions back in 2022, alleging the crypto-mixing tool helped launder over $7 billion in illicit funds.
And yet it’s still in use for many, reveals a new report from the Federal Reserve Bank of New York.
Four Fed researchers explained that even though transaction volumes dropped at first, Tornado Cash’s proposition as a key privacy tool held up.
Does that mean sanctions aren’t effective in crypto?
It depends.
The Office of Foreign Assets Control’s sanctions strategy has been successful for centralised entities, such as non-compliant crypto exchanges like Suex and Bitzlato, said Ari Redbord, the global head of policy and government affairs at blockchain analytics firm TRM Labs.
“Where it gets more complicated is when OFAC has used sanctions to go after more decentralized entities like Tornado Cash,” Redbord told DL News.
While Tornado Cash volume fell dramatically, “we do still see illicit actors using the service.”
How to sanction crypto tech
Tornado Cash lets users deposit Ethereum into a larger pool of other Ethereum deposits. After they deposit their tokens from an address, they can withdraw those tokens from a completely new address.
That’s a useful feature for those who want to hide their crypto transactions, such as persecuted dissidents and, of course, criminals. Vitalik Buterin, the Russian-Canadian co-founder of Ethereum, used Tornado Cash to donate to Ukraine. Unlike a crypto exchange, Tornado Cash is a program written on the Ethereum blockchain. It can’t be turned off.
In an unprecedented move, OFAC sanctioned Tornado Cash — a crypto smart contract — in August 2022. The agency reasoned that the tool had facilitated billions in laundered funds for groups like Lazarus, a hacker group with ties to North Korea.
The tool’s developers have also faced strict legal action. In May, Alexey Pertsev, a Tornado Cash developer, was sentenced to a 64-month prison term. The other developer, Roman Storm, faces trial in September.
The sanctions and criminal charges against the developers have cratered activity on Tornado Cash.
The Federal Reserve Bank of New York’s report showed that transaction volumes across all anonymous pools crashed by 72% after the sanctions. Data from Dune analytics shows that in the days after the sanctions, roughly $291 million in Ether exited the platform.
New challenges for crypto privacy
The report reveals that some of the smaller pools, however, such as those with transactions between one and one-tenth of an Ether, have returned to pre-sanction levels.
Still, it would be difficult to launder large amounts of illicit funds in such shallow pools.
This is why organisations like Lazarus, looking to move millions of dollars, have already moved to different platforms.
Booting hacker groups while simultaneously offering legal alternatives for lawful users is one hurdle, said Redford.
“The real challenge for regulators when it comes to mixers is ensuring that lawful users are able to transact in a secure and private manner, while, at the same time stopping North Korea, sanctions evaders, and cybercriminals from taking advantage of privacy-enhancing technology.”
Liam Kelly is a DeFi correspondent at DL News. Reach out at liam@dlnews.com.