Decentralization meant sanctions couldn't 'pull the plug' on Tornado Cash: Chainalysis

Sanctions aimed at decentralized crypto mixer Tornado Cash weren’t able to completely cut off its usage, though it has hamstrung the service, a blockchain analytics firm has shared.

On Aug. 8, the Office of Foreign Assets Control (OFAC) announced sanctions against the crypto mixer for its role in the laundering of crime proceeds.

In a report published on Jan. 9, Chainalysis said the sanctions did have some effect, causing total inflows to the mixer to drop by 68% in the 30 days after the sanctions came into force.

1/ The first section preview of our 2023 Crypto Crime Report is here, and it’s all about sanctions. In this we look at how the US’ crypto-related sanctions strategy has evolved over time and 3 of OFAC’s biggest #crypto service designations to date.https://t.co/gOp1rHOQgx

— Chainalysis (@chainalysis) January 9, 2023

However, the firm also emphasized that because Tornado Cash is a smart-contract-based decentralized platform, “no person or organization can ‘pull the plug’ as easily on Tornado Cash as they could with a centralized service.”

Chainalysis gave the example of darknet marketplace Hydra, which in contrast, saw its cryptocurrency inflows drop to zero after German police seized its servers as a result of sanctions.

Chainalysis explained that while sanctions applied to Tornado Cash saw its “front-end website taken down, its smart contracts can run indefinitely, meaning anyone can still technically use it at any time,” adding:

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

OFAC came down hard on Tornado Cash in Aug. 2022 due to concerns that individuals and groups had allegedly used the mixer to launder billions worth of crypto since 2019 including the $455 million stolen by the North Korea-affiliated Lazarus Group.

The agency then amended those sanctions in November as it cracked down on the platform even further for: “enabling malicious cyber activities, which ultimately support the DPRK’s [weapons of mass destruction] program.“

In its latest report, Chainalsis’ research indicated that illicit use of Tornado Cash was primarily related to crypto hacks and scams, with a rough average of 34% of all inflows being attributed to having originated from such.

While the sanctions could not stop the mixer entirely, it did effectively work to spook people away from using that platform, with total inflows dropping by 68% in the following month.

Specific figures are not given, however the chart shows that daily inflows were at times hitting nearly $25 million per day in the 30 days prior to the sanctions, and then subsequently dropped under $5 million per day in the aftermath.

“Those incentives appear to have been powerful, as its inflows fell 68% in the 30 days following its designation. That’s especially important here given that Tornado Cash is a mixer, and mixers become less effective for money laundering the less funds they receive overall,” the report reads.

Related: DeFi security losses rose 47.4% in 2022 to hit $3.64B: Report

This week, a separate report from blockchain security firm SlowMist also gave some indications about the type of money that flowed through Tornado Cash in 2022. According to the firm’s research, 1,233,129 Ether (ETH) worth $1.62 billion was deposited into the platform last year, with 1,283,186 ETH pulled out ($1.7 billion).

3/ TornadoCash: In 2022, users deposited a total of 1,233,129 ETH to it and withdrew 1,283,186 ETH from it. ChipMixer: In 2022, users deposited a total of 40,065.33 BTC to it and withdrew 22,582.44 BTC from it. View the full PDF report for additional details. pic.twitter.com/ib2KnnpN9b

— SlowMist (@SlowMist_Team) January 9, 2023