Sanctions represent a powerful tool wielded by the U.S. government to exert influence on global financial activities, particularly those deemed to pose threats, such as money laundering, funding terrorism, or supporting rogue states. In a recent report, the Federal Reserve Bank of New York evaluated the tangible effects of these sanctions within the cryptocurrency sphere, specifically targeting the controversial crypto mixer, Tornado Cash.

The Influence of Sanctions

The U.S. government’s decision to sanction Tornado Cash—anonymizing software that allows users to obscure the trail of cryptocurrency transactions—sparked considerable debate. Central to this discourse is whether individuals should have the right to online transactional privacy and whether services like Tornado Cash, which facilitate such privacy, can withstand governmental pressure and censorship. The New York Fed’s examination sheds light on the effectiveness of the Office of Foreign Asset Control’s (OFAC) 2022 sanctions and the subsequent shifts in Tornado Cash’s usage.

Dissecting the Impact

Sanctions by OFAC entail prohibiting U.S. persons—including citizens, residents, and entities with U.S. ties—from interacting with the blacklisted entity. Following the initial sanctions against Tornado Cash, its usage plummeted by approximately 90%, according to data from TRM Labs in October 2023.

However, the New York Fed’s report, published two years post-sanction, indicates a partial recovery in Tornado Cash’s usage, particularly among smaller transaction pools. This resurgence, albeit limited, suggests that retail users still find value in the service despite the crackdown. Interestingly, while block proposers—those who suggest transactions for inclusion in the blockchain—continue to include Tornado Cash transactions, block builders—those who assemble these transactions into blocks—are increasingly excluding them.

The Role of Regulation and Ideology

The report highlights two significant observations. First, sanctions compliance notably intensified after an August 2023 court ruling that categorized Tornado Cash as an entity under OFAC’s jurisdiction. This ruling clarified the regulatory landscape, prompting large block builders to adopt a more cooperative stance. Second, the report notes that non-compliance is largely driven by ideological convictions—specifically, those who staunchly advocate for censorship resistance.

“Clarity around regulation emerged as a pivotal factor in determining cooperation,” the report asserts. It further reveals that two block builders were responsible for more than half of the non-compliant blocks, underscoring a surprising fragility in Ethereum’s censorship resistance.

Deterioration of Privacy and Profit Motives

The privacy functionality of Tornado Cash has eroded over the past two years, with both transaction volumes and wallet diversity declining. The report also points out that blocks containing Tornado Cash transactions tend to generate lower fees compared to those that do not, suggesting that validators who process these transactions are driven more by philosophical beliefs than by financial incentives.