In a landmark enforcement action, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, a popular decentralized crypto mixer, on August 8, 2022. The tool was allegedly used to launder over $1 billion in illicit proceeds, including funds linked to the North Korea-affiliated Lazarus Group. This marked the first time a smart contract-based DeFi tool was added to the SDN (Specially Designated Nationals) list.

The move ignited widespread debate within the crypto and compliance communities. While many DeFi advocates criticized the sanctions as an attack on open-source code and financial privacy, regulators argued that Tornado Cash had become a hub for illicit finance due to its lack of KYC and transaction traceability.

The sanctions forced exchanges and infrastructure providers to block wallets that had interacted with Tornado Cash, effectively isolating those funds from the broader crypto ecosystem. Developers associated with the project faced legal scrutiny, and contributors began to remove GitHub repositories under pressure.

For compliance professionals, the Tornado Cash case is a wake-up call. AML responsibilities now extend into the DeFi space, and institutions must develop risk assessment methodologies that cover non-custodial platforms and smart contracts. Tools like blockchain analytics and wallet screening must be enhanced to capture DeFi risk indicators.

This event underscores the need for clearer regulatory guidance on DeFi while demonstrating that authorities are willing to act decisively when traditional AML principles are ignored.

Source: U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash
Image Source: Wikimedia Commons: File:Seal on United States Department of the Treasury on the Building.JPG