What is OFAC compliance for DeFi?

OFAC compliance for DeFi protocols is the application of sanctions screening and blocking requirements to decentralized finance — an area where OFAC's traditional entity-based enforcement model collides with permissionless smart contracts.

The Tornado Cash precedent

In August 2022, OFAC designated Tornado Cash — a smart contract protocol — as a blocked entity. This was unprecedented: for the first time, code itself (the smart contract addresses) was designated. US persons are prohibited from interacting with Tornado Cash smart contracts, and several front-end operators and GitHub contributors faced legal consequences.

Compliance approaches for DeFi

At minimum, screen wallet addresses at the front-end level before allowing interaction with your protocol. If you control the front-end interface, blocking sanctioned wallets from using it is the baseline. More advanced approaches include on-chain screening via wallet screening oracles and compliance-focused smart contract patterns.