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Ethereum's Compliance with OFAC Regulations
Following the significant Merge upgrade in September 2022, Ethereum transitioned from a proof-of-work (PoW) to a proof-of-stake (PoS) framework. As a result, the rate of compliance with standards established by the Office of Foreign Assets Control (OFAC) has seen a noteworthy decrease.
Blocks of Ethereum that conform to OFAC regulations censor particular transaction types, which adversely affects the neutrality of the Ethereum environment. In the early days of August 2022, the OFAC imposed sanctions on Tornado Cash and a number of Ethereum (ETH) addresses linked with it due to their capacity to conceal and anonymize transactions.
Influence of The Merge upgrade on OFAC Compliance Rates
Prior to the Merge transition, there was a significant growth in Ethereum's OFAC compliance as entities like crypto exchanges chose to employ censoring MEV-Boost relays on their validators. Major platforms such as Binance, Celsius Network, Bitfinex, Ledger Live, Huobi (HTX), and Coinbase are among the top censors, according to data from MEV Watch.
However, after the Merge transformation, Ethereum's overall conformity with OFAC policies has seen a significant decline. In November 2022, 78% of all Ethereum blocks were in line with OFAC regulations. As of September 27, the OFAC compliance rate has plummeted to just 30%, marking an overall reduction of 57%.
Overcoming OFAC Regulations and Major Players
To overcome OFAC regulations, operators are encouraged to use relays that aren't bound by the OFAC's censorship requirements. Notably, there are seven key MEV-boost relays that are predominantly employed: Flashbots, BloXroute Max Profit, BloXroute Ethical, BloXroute Regulated, BlockNative, Manifold, and Eden. However, as MEV Watch reports, not all systems comply with OFAC regulations.
While OFAC rules predominantly target entities in the United States, validators based outside of the U.S. should contemplate running non-censoring relays to contribute to the network's benefit.
Response to the decline in OFAC Compliance
In light of Ethereum's dwindling OFAC compliance, Grayscale elected to relinquish all rights to PoW Ethereum tokens (ETHPoW), citing a scarcity of market liquidity as the primary reason behind their decision.
Conversely, some cryptocurrency investment firms like ETC Group are striving to launch dedicated EthereumPoW exchange-traded products (ETPs).
