Ethereum Block Builders Comply with Tornado Cash Sanctions: Fed Reports

A recent report from the Federal Reserve Bank of New York, released on Wednesday, revealed that Ethereum block builders have largely adhered to the sanctions imposed on the crypto mixer Tornado Cash.

Although some activity on the platform continues, the Fed’s report assesses the impact of the U.S. Treasury’s Office of Foreign Assets Control (OFAC) blacklisting on Tornado Cash’s usage.

Fed’s Report and Background on Tornado Cash Sanctions

The report indicates that block validators closest to a transaction’s origin are more likely to cooperate with the sanctions, especially after a court ruling in August 2023 upheld OFAC’s decision.

Validators further away from the transaction’s source are less likely to comply, however, particularly if they are non-U.S. persons outside the country.

“We find direct evidence of large builders switching to a cooperative posture following the ruling, giving credence to the idea that clarity around regulation is a pivotal factor in determining whether to cooperate,” the paper states.

The report’s findings also highlight the ongoing tension between privacy and regulatory compliance in cryptocurrency.

While mixers like Tornado Cash serve a legitimate purpose for users seeking financial privacy, their potential for exploitation by criminal entities has sparked global law enforcement scrutiny.

Recall that Tornado Cash was sanctioned by OFAC in August 2022 following allegations that it was used to launder approximately $7 billion, including at least $455 million stolen on behalf of North Korea.

The U.S. Treasury Department redesignated sanctions on Tornado Cash in October 2023, claiming that North Korea’s Lazarus Group had laundered over $100 million stolen in crypto heists through the crypto-mixing service.

Crypto mixers hide the origin and destination of transactions, making them valuable tools for privacy-conscious users and attractive to illicit actors.

Legal Challenges and Controversies Involving Ethereum Block Builders and OFAC

The regulatory action has sparked controversy within the crypto community as six Ethereum users challenged OFAC’s decision in court but ultimately lost their case.

The legal status of crypto mixers is contentious, as evidenced by the ongoing trial of Roman Storm, one of Tornado Cash’s developers, and the conviction of Alexey Pertsev for money laundering in the Netherlands.

The Fed’s paper briefly acknowledges the privacy versus criminality debate but does not look deeply into the controversy.

Critics argue that blanket sanctions on privacy tools may infringe on legitimate users’ rights, while supporters contend that such measures are necessary to combat financial crime.

The report’s focus on cryptocurrency-related crime contrasts with broader financial crime statistics.

While the paper notes that cryptocurrencies are “implicated at the nexus of cyber and financial crime,” data from blockchain analysis firm Chainalysis suggests that illicit crypto transactions currently account for only about 0.33% of all transactions.

This figure is much lower than the estimated 3-5% of global GDP attributed to illicit finance in traditional financial systems.