Tornado Cash sanction cooperation was “mixed,” NY Fed finds 

A new study from the New York Federal Reserve found that the US government’s sanctions against cryptocurrency mixing service Tornado Cash were somewhat effective, but cooperation was ultimately “mixed.” 

The US Department of Treasury’s Office of Foreign Assets Control (OFAC) blocked Tornado Cash in August 2022, marking the first time the US government sanctioned a non-custodial smart contract. 

Tornado Cash transactions, both by volume and value, instantly fell after the sanctions were announced, the NY Fed found. User diversity, which researchers measured by the number of unique addresses, also “dropped significantly” in the weeks after Tornado Cash was blocked. 

Read more: US Treasury sanctions crypto mixing service Tornado Cash

Still, even as usage lowered, anonymity pools — which determine how anonymous transactions can become when using the mixer — were able to remain large, researchers said. 

“Despite gross drops in flows to and from Tornado Cash addresses, we find an increase in the total value deposited in Tornado Cash addresses, relative to pre-sanction levels, for all but the largest denominated pool,” the NY Fed report, published Wednesday, notes.

“Tornado Cash remains viable as a privacy tool, particularly in the view of users,” the report adds.

The study found that while the majority of Ethereum block builders seemed to cooperate by censoring Tornado Cash transactions, there were two builders that continued to actively settle Tornado Cash transactions. These two players accounted for more than half of all non-cooperative blocks, the report claims. 

Validators who were non-cooperative seemed to have no monetary incentive, the report adds. It states that blocks containing Tornado Cash transactions generally had lower rewards, suggesting validators were “motivated by philosophical reasons.” 

The sanctions sparked controversy around what the Treasury can deem a “person.” 

Six Ethereum blockchain users in September 2022 filed a lawsuit against OFAC challenging their authority to designate Tornado Cash as a specially designated national (SDN). A Texas federal judge eventually sided with the Treasury, ruling in September 2023 that the sanctions were permitted, as “person” is defined as an “individual or entity.”

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