The Federal Reserve Bank of New York recently issued a Staff Report on the impact of sanctions imposed by the Office of Foreign Assets Control on Tornado Cash, a smart contract protocol, and the effectiveness of regulating decentralized systems. According to the report, there was “an immediate and lasting impact” on Tornado Cash following the imposition of sanctions based on market reaction, transaction volume and diversity of users. However, the NY Federal Reserve found that Tornado Cash is still viable as a privacy pool, and net flows into Tornado Cash contracts still “recover to and surpass” pre-sanctions levels for most pools. The evidence seems to send a mixed message because the aggregate share of non-cooperative blocks is increasing over time despite the shrinking number of actors processing Tornado Cash transactions. According to the NY Federal Reserve, this is not a clear indicator of marketplace defiance or sanctions violations, but may reflect activity by foreign persons not subject to OFAC sanctions or users that are not aware that their actions violate OFAC sanctions.
New York Federal Reserve Staff Report Summary | Regulating Decentralized Systems: Evidence from Sanctions on Tornado Cash