- The New York Federal Reserve has reported that sanctions against Tornado Cash have led to a significant drop in its usage
- The sanctions, imposed in August 2022, have had an immediate and lasting impact on Tornado Cash
- Despite this, the Federal Reserve has noted that some pools have returned to pre-sanction levels
The New York Federal Reserve has claimed that sanctions against mixing service Tornado Cash were successful, noting that the value and volume of Tornado Cash usage dropped “precipitously” following the measure. In a report issued yesterday, the Federal Reserve claimed that the sanctions, applied in August 2022, has had an “ immediate and lasting impact” on the service, although it also noted that some pools are returning to pre-sanction levels.
Partial Recovery
The US Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash in 2022, with its founders arrested shortly afterwards. According to blockchain analytics firm TRM Labs, usage dropped by 90% in the immediate aftermath, but the New York Federal Reserve report highlights a partial recovery in usage over the past two years.
The report notes that while transaction volumes and diversity in larger Tornado Cash pools have not returned to pre-sanction levels, “net flows into TC contracts recover to and surpass pre-announcement levels for most pools,” indicating continued interest from retail users. Despite block proposers including Tornado Cash transactions, block builders are excluding them, further complicating the picture.
Censorship Resistance Remains “Fragile”
Two key points from the report are worth noting. Firstly, compliance with sanctions significantly increased after an August 2023 court ruling, which determined Tornado Cash is an entity under OFAC definitions. This ruling led to major builders adopting a cooperative stance towards the sanctions.
Secondly, the report identifies ideological resistance among certain entities as a reason for non-compliance. These entities, which prioritize censorship-resistance, contribute significantly to the non-cooperative blocks, but a “shrinking number of actors process Tornado Cash transactions,” which the paper says indicates “a fragility to the sustainability of censorship-resistance.”
The report concludes that Tornado Cash’s privacy functionality has deteriorated due to decreased transaction volumes and fewer wallets using the mixer, which is about as big a win as it could have realistically hoped for. Additionally, blocks containing Tornado Cash transactions generate lower fees, suggesting validators are driven by philosophical motives rather than profit.
The co-developer of Tornado Cash, Alexey Pertsev, was sentenced in May to over five years in prison for his role in launching and maintaining Tornado Cash, while the other co-founder, Roman Storm, is still facing trial in the US.
