Ethereum Entities Largely Complied With Tornado Cash Sanctions, NY Fed Paper Says

• A new report from the NY Fed said Ethereum block builders have largely cooperated with sanctions on Tornado Cash.

• Block validators that are immediately downstream of a transaction are likely to cooperate, the report said, noting that sanctions may not apply to non-U.S. persons.

Ethereum block builders have largely cooperated with sanctions on Tornado Cash, despite there still being some activity with the crypto mixer, said a new report from the Federal Reserve Bank of New York.

The New York Fed published a paper on Wednesday evaluating the effect the Office of Foreign Asset Control’s blacklisting of Tornado Cash had on its usage. Mixers are designed to support privacy by obfuscating the origin and destination of transactions, but law enforcement entities like OFAC have targeted several of them due to their use by illicit actors, including North Korea. The U.S. Treasury Department banned all U.S. persons from engaging with it in August 2022.

Roman Storm, one of the developers of Tornado Cash, is currently facing trial over his role in the project, with prosecutors and defense attorneys arguing over whether it is a software tool or a service. Another developer, Alexey Pertsev, was convicted in the Netherlands on similar charges earlier this year.

Wednesday’s paper suggested that while block validators that are immediately downstream of a transaction are likely to cooperate – particularly after a court ruling supporting the sanctions – nodes that are further away from a transaction’s origination are less likely to be cooperative.

“To examine the impact of regulatory clarity and judicial precedent on cooperation, we exploit the timing around the court ruling in August 2023 that ruled in favor of OFAC,” the paper said. “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 to determining whether to cooperate.”

The paper included the caveat that it was measuring cooperation with the sanctions, but those sanctions may not apply to non-U.S. persons (defined as any citizens or residents and entities) outside of the country. In other words, non-cooperation doesn’t necessarily mean anyone is using Tornado Cash in violation of the sanctions.

Still, “the total value and volume of Tornado Cash drops precipitously” in the sample period measured, the paper said, and just one entity was responsible for most of the blocks containing funds sent through the mixer.

“Although Tornado Cash transactions continue to be settled, censorship-resistance appears more tenuous than what the transaction volume suggests,” the paper said.