Have the 2022 Crypto Sanctions Had a Real Impact?

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The United States and other financial institutions and law enforcement agencies are stepping up their efforts to sanction crypto entities. The United States and its Office of Foreign Assets Control (OFAC) have changed the modus operandi used to impose sanctions.

The consequences of this different approach have been mixed, and for many in the crypto industry, it has set up a new paradigm and crossed a line that US agencies have toed in the past. The most emblematic of these cases was the sanctions against Ethereum-based decentralized exchange Tornado Cash and its developers.

The Number Of Crypto Sanctions Trends To Rise In 2022

According to a report by on-chain analytics firm Chainalysis, US law enforcement used to sanction individuals and entities. In 2018, OFAC announced its first crypto-related sanctions against two Iranian individuals.

Over the following years, these sanctions grew in scope and involvement. As the chart below shows, crypto sanctions have tended to increase over the next few years, with 2022 seeing the largest spike in the number of sanctioned addresses and entities.

Source: Chain Analysis

OFAC changed its approach when it decided to target crypto wallets. The graph shows a focus on addresses assigned to bad actors. The report claims that law enforcement chose to target “large entities” and various services.

The change in approach is attributed to the high number of cybercrime activities recorded over the past two years. The financial institution targeted hackers, drug traffickers and money laundering operations:

() This diversity of entities represents a huge change from OFAC’s pre-2021 designations, which were all against individuals and, at the blockchain level, included only a relatively small number of personal wallets.

Chainalysis claims billions of dollars were stolen from digital asset projects and protocols in 2022 alone, but what are the results of these new sanctions?

Sanctioned crypto entities are different, should they be treated differently?

At this point, things got complicated and the implications of the sanctions for the crypto industry also changed. In addition to Tornado Cash, the report examines darknet market Hydra and Russian crypto exchange Garantex.

Each of these entities is different and had different on-chain activity before OFAC targeted them. As shown in the graph below, the number of funds attributed to “legal” (in blue) and “illegal” (in orange) varied.

While Hydra and Garantex had regular inflows of illegal and “risky” funds, Tornado Cash saw spikes in these metrics. The decentralized exchange allows anyone to trade their tokens, and bad actors are using it to launder millions of stolen funds.

Source: Chain Analysis

Data from the report claims that 34% of funds sent to Tornado Cash are believed to come from illicit sources, while Hydra and Garantex recorded 68% and 6% respectively. However, the decentralized exchange recorded most of these funds in a single transaction attributed to a single bad actor.

In this sense, Chainalysis was able to determine the specific illicit activities that supported these entries. While Tornado Cash mostly profited from hacks and scams, Garantex and Hydra’s funds came from child pornography, illegal sales, fraud and more.

After the sanctions, entries for Hydra, a Germany-based marketplace, were 0. Authorities in the country cooperated with the sanctions and the platform was taken down.

Garantex saw the opposite; bad actors sent more funds to the platform. Under the protection of Russian jurisdiction, no one was willing to enforce the sanctions imposed by a US entity.

Tornado Cash has also seen a decline in inflows, but the implications go beyond that measure. The developers of the decentralized exchange have seen the consequences in the real world. One of them remains in the custody of law enforcement.

ETH price trends higher on the 4-hour chart. Source: ETHUSDT Tradingview

Tornado Cash runs on a decentralized blockchain, using open-source software. Its sanctions could have set a dangerous precedent for the fledgling industry. Moreover, the Chainalysis report shows that sanctions are only effective when supported by local agencies to enforce them.

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