The blockchain analytics firm, TRM Labs, says that the Tornado Cash sanctions pose new problems for crypto firms trying to comply with US regulations. TRM Labs provides information to crypto entities such as Aave, Uniswap, and Circle which helps them comply with various regulations and track illicit activity.
It monitors crypto addresses and sorts them by their level of risk involved, enabling crypto entities to prevent dealing with laundered funds or bad actors. This helps in assessing whether addresses are compliant with US sanctions.
TRM labs also elaborated on how it works with DeFi protocols to help them try to stay compliant. However, the firm pointed out that these sanctions are different from previous rules in a way that makes it vague how to adhere to them.
This is the first time the OFAC has sanctioned a set of smart contracts instead of a normal blockchain wallet, noted TRM Labs. It also emphasized that generally, it’s comparatively easy to identify if someone has interacted with the wallet either by sending or receiving funds from them.
Also Read: Why did U.S. OFAC Sanction Tornado Cash?
On the other hand, smart contracts are more complicated. What makes Tornado Cash designation challenging from an enforcement and compliance perspective is that any person who deposits funds into the crypto mixer can trigger its smart contracts to send funds to any other Ethereum address(es), stated TRM labs.
Also, someone could send funds to Tornado Cash and then specify that those funds be deposited into a completely unrelated crypto address belonging to an unsuspecting, random, and even unwilling person.
TRM Labs also noticed that this kind of incident already happens when a user sent ETH from Tornado cash to Jimmy Fallon, Coinbase CEO Brian Armstrong, and Youtuber Logan Paul among many other celebrities. This prank was pulled to demonstrate the recent sanction can not be easily enforced.
Due to the uncertainty, TRM Labs explained it offers three levels of risk data. As such, when a crypto firm pings it with an address, TRM Labs provides data that helps crypto firms to identify whether the address is sanctioned.
Yet, TRM Labs pointed out that dusting attacks are a particular problem since they are technically an interaction with a sanctioned entity. This way the firm is unable to dismiss them – especially without any guidance from regulators.
Consequently, this pushes the responsibility onto crypto entities to individually decide whether to allow wallets that have been hit by dusting attacks.
