Unstoppable Tornado Cash avoids sanctions

Key points: 

• On August 8th, the OFAC announced sanctions against the Tornado Cash mixer for its alleged involvement in the laundering of criminal funds.
• Chainalysis documented that the sanctions did have an effect, causing total inflows to the mixer to decrease by 68% in the 30 days following the sanctions' implementation.
• Tornado Cash is also a decentralized platform that is powered by smart contracts, this means that "no one" can "pull the plug" as easily on Tornado Cash as they can with a centralized service.
• While sanctions against Tornado Cash affected its front-end website, its smart contracts are still capable of running indefinitely, which means that anyone can still utilize it at any time.
• Daily inflows were at times reaching nearly $25 million per day in the 30 days before the sanctions, and then subsequently decreased to around $5 million per day following the sanctions.

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Sanctions intended to curtail the use of decentralized crypto mixer Tornado Cash were unsuccessful, however, it has hindered the service, a blockchain analytics company has reported.

On August 8th, the OFAC announced sanctions against the mixer for its alleged involvement in the laundering of criminal funds.

In a report published on January 9th, Chainalysis documented that the sanctions did have an effect, causing total inflows to the mixer to decrease by 68% in the 30 days following the sanctions' implementation.

However, Tornado Cash is also a decentralized platform that is powered by smart contracts, this means that "no one" can "pull the plug" as easily on Tornado Cash as they can with a centralized service.

While sanctions against Tornado Cash affected its front-end website, its smart contracts are still capable of running indefinitely, which means that anyone can still utilize it at any time.

In August, the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) sanctioned Tornado Cash for allegedly facilitating the laundering of over $4 billion in crypto since 2019, including the $455 million stolen by the North Korea-affiliated Lazarus Group.

“That suggests sanctions against decentralized services act more as a tool to disincentivize the service’s use rather than cutting off usage completely.”

The agency then modified those sanctions in November, as it intensified its crackdown on the platform, it was accused of facilitating malicious cyber activities that ultimately supported the North Korean weapons program.

Chainalsis' research revealed that the majority of Tornado Cash's illicit use was attributed to crypto hacks and scams, with an average of 34% of all inflows being attributed to this.

The sanctions were not intended to eliminate the mixer, but they did have the effect of spooking people away from using it, total inflows decreased by 68% in the following month.

The chart does not include specific numbers, however, the graph demonstrates that daily inflows were at times reaching nearly $25 million per day in the 30 days before the sanctions, and then subsequently decreased to around $5 million per day following the sanctions.

Before and after inflows for sanctioned platforms. Source - Chainalysis

These incentives are believed to have been significant, as their inflows decreased by 68% in the 30 days following designation. This is particularly significant given that Tornado Cash is a mixer, and mixers become less effective for money laundering the less money they receive in total.

This week, a separate report from SlowMist also indicated the type of money that was circulated through Tornado Cash in 2022. According to the company's research, 1.23 billion Ether worth $1.62 billion was deposited into the platform in 2020, and 1.28 billion Ether worth $1.7 billion was withdrawn.