🌪 Tornado Cash sanctioned by OFAC!

Photo by NOAA on Unsplash

The Tornado Cash attracted a lot of attention to numerous topics, starting from the responsibilities of developers, collateral damages of sanctions, unclear regulatory guidelines on sanctions implementation, and the influence of a particular regulator over the Ethereum proof of stake protocol.

For the compliance professionals the case of Tornado Cash is a peculiar one and stands out in many ways, but it can hardly be a surprise, this mixing service is not the first in the line of similar services taken down by the authorities, there were Blender, Helix, Bitcoin Fog.

Blockchain monitoring solutions for a very long time had been marking wallets associated with online mixing/tumbler services as high risk which in return requires an Enhanced Due Diligence.

What makes Tornado Cash stand out is that it is the first prosecuted decentralized, non-custodial blockchain service, the weight of the sanctions, collateral damage, and regulatory implications.

Decentralized, non-custodial services have been gaining a lot of momentum recently, and many believed that their features might serve as protection and indemnify their creators from compliance obligations. As we can clearly see that is not the case. Services are encouraged to take responsibility for their risks to facilitate financial crime regardless of whether they take custody, actively manage transactions or just create a piece of code.

The first-ever sanctions by the OFAC US towards blockchain services are two mixer services one centralized Blender.io and decentralized Tornado Cash. The sanctions by the OFAC are pretty much global as they prohibit transacting with sanctioned entities, directly and indirectly, getting into the sanctioned by the OFAC list essentially cuts one off of any licensed financial services apart from maybe Russia, Iran, and DPRK.

The unusual volume of collateral damage due to the OFAC sanctions in place is caused exactly by the fact that a sain company centralized or decentralized can allow a tainted coin to touch their wallets, as their partners may consider them as sanctions non-compliant.

We do hope that the licit users and their service providers would find a way to resolve the Due Diligence issues.

As for the regulatory implications, our company has made sure that our blockchain monitoring provider added all designated and identified wallets to the watchlist. We also would like to point out that Etherium switching to the proof of stake protocol shifts the regulatory burden to whoever is validating a transaction, essentially making Etherium compliant with US regulations, given that the majority of validators are under US legislation.

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