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Sanctions Fail to Stop Tornado Cash: Chainalysis Report

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• In August 2022, the U.S. Treasury Department imposed sanctions on popular crypto mixer service Tornado Cash for its alleged role in facilitating money laundering.
• A recent report by Chainalysis shows that the sanctions led to a 68% decline in total inflows to the mixer service in the first month following the implementation.
• Despite the sanctions, the underlying smart contracts of the mixer service remain unaffected and can thus run indefinitely.

The Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury sent shockwaves throughout the crypto world when it announced sanctions against popular crypto mixer service Tornado Cash in August 2022. The sanctions were implemented due to the service’s alleged role in facilitating money laundering, particularly of proceeds of cybercrimes committed against victims in the United States.

In an effort to analyze the impact of the sanctions, blockchain analytics firm Chainalysis released a report on the 9th of January. The report revealed that the total inflows to the mixer service had declined by 68% in the first month following the implementation of the sanctions.

Given that the mixer is a decentralized service, it is impossible to completely „pull the plug“ on it as it is not subject to the same regulations or sanctions imposed on centralized protocols. Therefore, it is likely that the decline in activity was due to the legal consequences of the sanctions, rather than the sanctions themselves. In other words, they served more as a dis-incentivization to potential users rather than an effective way to disable Tornado Cash.

The report further highlighted that the sanctions led to the mixer’s front-end website being taken down, but had virtually no impact on the underlying smart contracts. These smart contracts can thus remain unaffected and run indefinitely, rendering the sanctions ineffective in the long run.

It is yet to be seen whether or not the sanctions will eventually be successful in curbing money laundering activities through the mixer service. What is certain, however, is that the sanctions have not been able to effectively „pull the plug“ on the underlying smart contracts due to their decentralized nature.