Tornado Cash Overcomes Initial Setback and Bounces Back
Despite facing sanctions in August 2022 for laundering stolen crypto assets worth over $455 million, Tornado Cash, a controversial coin mixer, has managed to recover and bounce back. Although it was delisted and redesignated by OFAC in November, its decentralized nature protected it from physical shutdown.
Chainalysis, a blockchain intelligence firm, has shared data with us that shows a significant drop of 93% in monthly inflows for Tornado Cash following the sanctions compared to the averages before the sanctions were imposed.
Tornado Cashโs Recovery After Sanctions
According to Chainalysisโs latest findings, inflows on the Tornado Cash tumbler have increased by 28% since the OFAC sanctions were imposed. The total inflow now amounts to $822.0 million. However, when compared to the period before the sanctions, there has been an 89.2% decrease in inflows, indicating the impact of the sanctions.
The amount of illegal transactions associated with sanctions has been steadily rising in recent years. This can be attributed to more entities being sanctioned and the difficulties in enforcing these sanctions on entities located in regions that do not adhere to OFACโs rules or on decentralized operations.
โItโs still important to monitor Tornado Cash as its continued activity over the past year highlights the challenge of enforcing sanctions on decentralized entities. This also demonstrates the effectiveness of sanctions and reinforces the need for regulation in the DeFi ecosystem.โ
In 2023, OFAC imposed 18 sanctions on entities using crypto addresses. Chainalysis has identified crypto addresses linked to OFAC-designated entities, including members of the Trickbot ransomware gang. These entities accounted for 61.5% of the illicit transaction volume, totaling $14.9 billion last year.
Unlike in 2022, where major services like Garantex, Hydra, Tornado Cash, and Blender.io were targeted, OFAC focused mainly on groups and individuals in 2023. However, Genesis Market and Sinbad.io were exceptions to this trend. This shift in OFACโs crypto-related targets is notable.
Crypto-Related Sanctions Activity
Crypto transactions linked to sanctioned entities have remained significant since 2022. Garantex and Tornado Cash have particularly contributed to this high volume. However, the amount of crypto sent to sanctioned regions has declined since the peak of the bull market in 2021.
In 2023, the top five sanctioned entities collectively received $821.4 million in crypto, with Sinbad.io leading at $665.4 million. The focus of sanctions has shifted towards smaller entities and individuals rather than major services.
Last year saw a significant increase in crypto-related sanctions related to OFACโs illicit drugs program, marking a four-fold increase compared to 2022. There was also an increase in sanctions targeting North Korea (DPRK2-4) and cybercriminals (CYBER2).
Due to the ongoing fentanyl crisis in the United States, there has been a prioritization of drug-related sanctions. OFAC introduced nine fentanyl-related sanctions, indicating an increased effort to combat drug-related activities facilitated through crypto.
Hot Take: The Challenges of Enforcing Sanctions on Decentralized Entities
Despite the initial setback caused by OFACโs sanctions, Tornado Cash has managed to recover and resume its activities as a decentralized entity. This highlights the challenges faced when trying to enforce sanctions on decentralized entities within the DeFi ecosystem.
The rebound of Tornado Cash also demonstrates the effectiveness of sanctions and the need for regulation within the crypto space. While decentralized operations may provide a level of immunity to physical shutdown, it is crucial to establish regulatory frameworks that can effectively address illicit activities and ensure compliance with international standards.
As the crypto industry continues to evolve, it is essential for regulators and law enforcement agencies to adapt and develop strategies to combat money laundering, terrorism financing, and other illicit activities facilitated through cryptocurrencies. This includes finding ways to enforce sanctions on decentralized entities without compromising the principles of decentralization and privacy that are valued by the crypto community.
Owen Patter is a distinguished crypto analyst, accomplished researcher, and skilled editor, leaving a notable imprint on the cryptocurrency landscape. As a proficient crypto analyst and researcher, Owen delves into the intricate realms of digital assets, offering insights that resonate with a diverse audience. His analytical acuity is harmoniously paired with adept editorial skills, allowing him to transform complex crypto information into easily comprehensible content.