The significant Merge upgrade in September 2022, which announced Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS), led to an overall decline in compliance with requirements specified by the Office of Foreign Assets Control (OFAC). Popular platforms such as Binance, Celsius Network, Bitfinex, Ledger Live, Huobi (HTX), and Coinbase are among the list of top censorship offenders.
In early August 2022, OFAC sanctioned Tornado Cash and several Ether (ETH) addresses associated with it due to its ability to mask and anonymize transactions. Following the Merge process, the Office of Foreign Assets Control (OFAC) has experienced reduced compliance from the Ethereum ecosystem since it poses a potential threat to the network’s principles of censorship resistance and decentralization.
Before the Merge upgrade, Ethereum’s OFAC compliance increased exponentially as entities such as crypto exchanges opted to run censoring MEV-Boost relays on their validators. Popular platforms such as Binance, Celsius Network, Bitfinex, Ledger Live, Huobi (HTX), and Coinbase, are among the list of top censorship offenders, according to MEV Watch data.
In November 2022, 78% of the total Ethereum blocks complied with OFAC regulations. As of today, Sept. 27, Ethereum’s OFAC compliance dropped to 30%, recording an overall reduction of 57%.
Operators who want to avoid OFAC compliance must employ relays that do not restrict content following OFAC compliance rules. Seven major MEV-boost relays are most commonly used: Flashbots, BloXroute Max Profit, BloXroute Ethical, BloXroute Regulated, BlockNative, Manifold, and Eden. However, not all systems adhere to OFAC compliance, according to MEV Watch:
“Of the 7 available major relays only 3 do not censor according to OFAC compliance requirements.”
It is also important to note that not all blocks built by OFAC-compliant relays are censoring; however, all blocks built by OFAC-compliant relays will censor when non-compliant transactions are broadcast to the network.
While OFAC regulations primarily target United States-based organizations, validators outside the U.S. must consider running non-censoring relays for the benefit of the network.
Following a decision from Grayscale, all the rights to PoW Ethereum tokens (ETHPoW) will be abandoned amid Ethereum’s reduced OFAC compliance. However, the decision was attributed to a lack of liquidity in the market. According to an official announcement:
“As such, it is not possible to exercise the rights to acquire and sell the ETHPoW tokens, and on behalf of the record date shareholders, Grayscale is abandoning the rights to these assets.”
On the other hand, some cryptocurrency investment firms like ETC Group have attempted to launch dedicated EthereumPoW exchange-traded products (ETPs).
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