Placebo effect for regulation? – 2022 was the year of many innovations in the ecosystem of cryptocurrencies. It was also the year of regulations. Thus, we have seen specifically The Office of Foreign Asset Control (OFAC) institutes sanctions against cash tornadoes. Were these sanctions effective?
OFAC versus Tornado Cash
Early last August, the Tornado Cash protocol was in the spotlight. Indeed, the US Office of Foreign Asset Control has blacklisted the protocol.
Thus, the American organization accused Tornado Cash of facilitating the laundering of more than 7 billion dollars. In response, OFAC has decided to issue sanctions against the protocol and the entities that interact with it.
Soon, many US-based cryptographic services moved to censor the protocol. Subsequently, this censorship also extended to Ethereum blocks, with the application of OFAC measures by many block producers.
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Are OFAC sanctions effective?
On January 9 the company chain analysisspecializing in on-chain data analysis, has published a study aimed at measure the effectiveness of the sanctions implemented by OFAC.
“We will see how the US government’s sanctions strategy on cryptocurrencies has evolved over time, examine the types of entities it has sanctioned to date, and analyze the impact of these sanctions on the entities themselves and the broader crypto-criminal ecosystem. »
More and more fines and penalties
As a first step, Chainalysis tried to make a history of sanctions. To do this, the company has been collecting data since 2018, the date of the first measurements issued by OFAC.
Thus, we can see that the number of sanctioned addresses and companies has grown steadily since 2018. However, it is important to note that these the actions remain relatively anecdotalwith only a dozen subjects sanctioned in 2022 for a total of around 350 addresses.
In 2022, the top three entities targeted by OFAC were:
- Hydrathe darknet market;
- Cash tornadothe decentralized mixer;
- Garantitexthe Russian decentralized exchange.
What impact have these sanctions had?
However, OFAC remains an American organization, so the sanctions applied do not necessarily have the desired effect on a global scale.
Thus, Chainalysis wished determine the real impact of these sanctions analyzing on-chain activity related to sanctioned entities, after OFAC has targeted them.
“On-chain data shows that each of the three sanctioned services was impacted differently. »
As we can see from the above graph, Sanctions against Hydra appear to have paid off. In fact, cryptocurrency transfers linked to this platform plummeted after the sanctions were put in place.
For its part, the Tornado Cash blending protocol also saw a notable decline in activity following the enforcement of sanctions by OFAC. Therefore, the protocol had a volume of between 5 and 10 million dollars before the implementation of the sanctions. After these, the protocol has seen its volume plummet, so much so that it rarely exceeds $5 million.
Thus, the sanctions put in place by OFAC appear to have had a moderate impact on Tornado Cashcertainly reducing the volume, but much less significantly than the Hydra market.
“As a global service, Tornado Cash likely had a higher number of users who could face consequences for violating US sanctions or be barred from using other services if their wallets showed exposure to Tornado Cash following its designation. »
Finally, the decentralized trading platform Garantex did not back down in the face of OFAC sanctions. Indeed, he even recorded an explosion in volume after the announcements of the American organization.
Conclusion: a half victory for OFAC
As Chainalysis points out, OFAC’s reach remains limited and its sanctions don’t always have the desired effect.
For example, the sanctions allowed the Tornado Cash website to be taken offline. As a result, it has become much less accessible, effectively reducing its audience. However, under the hood Tornado Cash is unstoppable smart contracts. Consequently, it can still be used despite the application of penalties.
“This suggests that sanctions against decentralized services act more as a tool to discourage use of the service rather than shutting it down altogether. In the case of Tornado Cash, these incentives appear to have been powerful, as its inflows fell 68% within 30 days of its designation. This is all the more important because Tornado Cash is a mixer, and mixers are less effective at laundering money the less funds they receive. »
For its part, the Ethereum community takes the censorship practiced on its blocks seriously. Thereby, the Flashbots project, at the origin of this censorship, has unveiled several ideas to mitigate this phenomenon.
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