Here's why Tornado Cash's activities didn't stop completely after OFAC sanctions

Here's why Tornado Cash's activities didn't stop completely after OFAC sanctions

The Office of Foreign Assets Control (OFAC)'s dabble in the crypto industry dates back to 2018, when it charged two Iran-based individuals with malicious cyber activity. Since then there has been no turning back. More recently, the bombshell announcement that the US Treasury Department has banned American citizens from using Tornado Cash has sent industry leaders into a frenzy.

While sanctions reduced Tornado Cash’s activity, a recent report from Chainalysis shows that “pulling the plug” on a decentralized protocol is not easy.

Impact of OFAC Sanction on Tornado Cash

Blockchain analytics firm Chainalysis released a new report highlighting OFAC's increased efforts to combat crypto activity and its impact on Ethereum-based coin mixer, Tornado Cash.

On-chain data before sanctions showed that 34% of all funds sent to Tornado Cash came from illegal sources, while illegal activity was only focused on crypto hacks and fraud. For example, last summer's Harmony Bridge exploit accounted for more than 65% of the mixer's total stolen cash inflows in a 60-day period before OFAC initiated sanctions against it.

However, this pattern of isolated, unique events and most illicit funds occurred in short spikes. This is in contrast to similar activity from services such as darknet markets, which see a more constant flow that creates a steady stream of money.

Posts against sanctions coin mixer activity have decreased significantly, but have not stopped completely. This is because Tornado Cash runs on smart contracts, which cannot be taken offline like a centralized service. Chainalysis therefore concluded that OFAC or any other body cannot do anything other than impose legal consequences for sanctions violations that prevent individuals from using it.

However, Tornado Cash became difficult to access after its website, which acted as a frontend for easy access to the mixing service, was removed. Its inflows fell 68% in the 30 days following its designation. The report stated,

"These incentives appear to have been strong, with inflows declining by 68% in the 30 days following their designation. This is particularly important here as Tornado Cash is a mixer, and mixers become less effective at laundering money the less funds they receive overall."

Privacy advocates condemn tyranny

The sanction against Tornado Cash provoked a massive backlash. Nonprofit blockchain advocacy group Coin Center filed a lawsuit against the U.S. Treasury Department in September, saying the move effectively criminalized citizens from wanting to protect their privacy while using their own crypto assets.

The prominent crypto exchange Coinbase also sued OFAC, accusing the financial intelligence agency of exceeding its authority.

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