On August 8, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced the imposition of sanctions on the decentralized digital asset mixer Tornado Cash. The action marks the first time OFAC has targeted an on-chain decentralized protocol. To date, OFAC has not issued any guidance specific to decentralized finance (DeFi) as part of its broader sanctions guidance for the “virtual currency” industry, but the Tornado Cash action lays down an important marker and makes clear that OFAC will target projects or protocols engaged in illicit activity regardless of their centralized or decentralized status. (Our prior blog post on OFAC’s general virtual currency guidance is available here).
According to OFAC, Tornado Cash was “used to launder more than $7 billion worth of virtual currency since its creation in 2019,” including over $455 million stolen by the Lazarus Group, a North Korean-backed hacking group that was previously targeted by OFAC sanctions. In announcing the action, Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson explained, “Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks.”