Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/302202 
Year of Publication: 
2024
Series/Report no.: 
Staff Reports No. 1112
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
Blockchain-based systems are run by a decentralized network of participants and are designed to be censorship-resistant. We use sanctions imposed by the U.S. Department of Treasury on Tornado Cash (TC), a smart contract protocol, to study the impact and effectiveness of regulation in decentralized systems. We document an immediate and lasting impact on TC following the sanction announcement, measured by market reaction, transaction volume, and diversity of users. Still, net flows into TC contracts recover to and surpass pre-announcement levels for most pools, supporting viability of TC. Evidence on cooperation at the settlement layer is mixed: the aggregate share of non-cooperative blocks increases over time, but a shrinking number of actors process Tornado Cash transactions, indicating a fragility to the sustainability of censorship-resistance. Non-cooperation is not explained by tokenomics, and changes in perception around legal authority and clarity of regulation appears to be a key factor for whether to cooperate.
Subjects: 
decentralized systems
digital assets
privacy
regulation
sanctions
JEL: 
G18
G28
G29
D40
F51
O30
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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