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arxiv: 2603.27739 · v2 · submitted 2026-03-29 · 💻 cs.CR

Ordering Power is Sanctioning Power: Sanction Evasion-MEV and the Limits of On-Chain Enforcement

Di Wu , Yuman Bai , Shoupeng Ren , Xinyu Zhang , Yiyue Cao , Xuechao Wang , Wu Wen , Jian Liu This is my paper

Pith reviewed 2026-05-14 21:59 UTC · model grok-4.3

classification 💻 cs.CR
keywords sanction evasionMEVstablecoinsblockchain enforcementUSDTUSDCordering powerEthereum
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The pith

Sanction enforcement on public blockchains is limited by who controls transaction ordering, not just contract blacklists.

A machine-rendered reading of the paper's core claim, the machinery that carries it, and where it could break.

The paper shows that freezes on USDT and USDC must compete as ordinary transactions with evasion transfers for block priority, allowing sanctioned addresses to drain funds before the blacklist takes effect. Data from 2017 to 2025 reveals that at least 7.3 percent of sanctioned USDT addresses and 18.7 percent of USDC addresses were emptied prior to enforcement, with evasion methods escalating from gas failures to direct payments to block producers. A game model demonstrates that this creates Sanction-Evasion MEV, forcing compliant issuers into the ordering market while concentrating advantages among specialized adversaries. The core point is that any privileged on-chain action executed through transactions faces the same incentive mismatch between contract authority and ordering power.

Core claim

Sanctions enforced via contract-layer blacklists on Ethereum-based stablecoins create races where both freezes and transfers bid for priority, generating Sanction-Evasion MEV that block producers capture. Longitudinal data shows substantial pre-freeze drains, and the model establishes that issuers cannot rationally remain outside the ordering market, that fixed costs concentrate evasion among MEV-aware parties, and that higher penalties raise the implicit MEV tax and encourage vertical integration into block building.

What carries the argument

Sanction-Evasion MEV (SE-MEV), the rents block producers extract when they prioritize higher-paying evasion transactions over issuer freezes in the same block.

If this is right

  • Compliant issuers must rationally participate in the ordering market to enforce sanctions.
  • Evasion concentrates among specialized MEV-aware adversaries because of fixed participation costs.
  • The implicit MEV tax on enforcement rises as regulatory penalties increase.
  • Incentives emerge for vertical integration between stablecoin issuers and block-building infrastructure.
  • The same ordering conflict applies to any privileged on-chain action such as emergency pauses or governance interventions.

Where Pith is reading between the lines

These are editorial extensions of the paper, not claims the author makes directly.

  • Regulators may need to develop enforcement tools that do not rely on ordinary transaction inclusion.
  • Similar priority conflicts could undermine other privileged actions like judicial freezes or circuit breakers on public chains.
  • Designs that separate enforcement actions from fee-based ordering might reduce the observed evasion window.

Load-bearing premise

The observed drains of sanctioned addresses result from priority races with evasion transfers rather than unrelated factors, and the game model accurately represents issuer choices without unmodeled costs.

What would settle it

A dataset showing zero pre-freeze drains across sanctioned USDT and USDC addresses, or direct evidence that block producers consistently include freezes ahead of higher-fee evasion transfers.

Figures

Figures reproduced from arXiv: 2603.27739 by Di Wu, Jian Liu, Shoupeng Ren, Wu Wen, Xinyu Zhang, Xuechao Wang, Yiyue Cao, Yuman Bai.

Figure 1
Figure 1. Figure 1: Reactive sanction races escalate into ordering competition across public and private regimes. [PITH_FULL_IMAGE:figures/full_fig_p004_1.png] view at source ↗
Figure 2
Figure 2. Figure 2: Overview of the dataset-construction pipeline [PITH_FULL_IMAGE:figures/full_fig_p005_2.png] view at source ↗
Figure 3
Figure 3. Figure 3: Statistics for Frozen Values [PITH_FULL_IMAGE:figures/full_fig_p007_3.png] view at source ↗
Figure 4
Figure 4. Figure 4: summarizes the distribution of sanctioned addresses in these categories. Finding 1. In aggregate, over 94% of on-chain sanctions are initiated through issuer-driven enforcement or compliance ac￾tions without a corresponding public OFAC designation. From this point onward, we keep the sanctioned-address pop￾ulation fixed and switch only the measurement axis from address counts to frozen value at sanction ef… view at source ↗
Figure 5
Figure 5. Figure 5: Trend of Gas Price Ratio of Sanction and Evasion [PITH_FULL_IMAGE:figures/full_fig_p009_5.png] view at source ↗
read the original abstract

Centralized stablecoins such as USDT and USDC enforce sanctions through contract-layer blacklist functions. Yet on public blockchains, a freeze is still an ordinary transaction competing with the sanctioned party's transfer for priority. It exposes a gap between contract-layer authority and ordering-layer enforcement: when both race for the same block, the outcome is set not by legal mandate, but by block producers' choices. Because both sides can pay for priority, sanction races create rents for block producers, which we call Sanction-Evasion MEV (SE-MEV). To measure this gap, we build the first longitudinal dataset of on-chain sanctions enforcement and evasion for Ethereum-based USDT and USDC from November 2017 to August 2025, covering more than $1.5 billion in frozen value. At least 7.3% of sanctioned USDT addresses and 18.7% of sanctioned USDC addresses had already been drained to zero before the freeze took effect. We also trace an escalation from issuer-side out-of-gas failures, to public gas auctions, private order flow, and direct payments to block producers, showing that block producers extract MEV from sanction enforcement. We then develop a game-theoretic model of stablecoin sanctions with MEV. It shows that compliant issuers cannot rationally stay outside the ordering market; fixed participation costs concentrate evasion among specialized MEV-aware adversaries; and the implicit MEV tax rises with regulatory penalties, creating incentives for vertical integration into block-building infrastructure. The problem extends beyond stablecoins. Any privileged on-chain action executed as an ordinary transaction -- emergency pauses, governance interventions, or judicial freezes -- faces the same conflict. Where ordering power follows economic incentives, ordering power is sanctioning power; contract-layer authority alone cannot guarantee enforcement.

Editorial analysis

A structured set of objections, weighed in public.

Desk editor's note, referee report, simulated authors' rebuttal, and a circularity audit. Tearing a paper down is the easy half of reading it; the pith above is the substance, this is the friction.

Referee Report

1 major / 2 minor

Summary. The paper claims that contract-layer sanctions on stablecoins like USDT and USDC are limited by the need for transaction ordering priority, leading to Sanction Evasion-MEV (SE-MEV). It supports this with a longitudinal dataset showing at least 7.3% of sanctioned USDT addresses and 18.7% of USDC addresses drained before the freeze transaction, traces the evolution of evasion tactics, and presents a game-theoretic model demonstrating that issuers must engage with the ordering market, with implications for any privileged on-chain actions.

Significance. If the central claim holds, the paper makes a significant contribution by quantifying the gap between contract authority and ordering enforcement through a novel dataset spanning $1.5B in value and a model that derives incentives for MEV participation and vertical integration. The strengths include the empirical measurement of drains and the parameter-free aspects of the game model where applicable, providing a foundation for understanding limits of on-chain enforcement.

major comments (1)
  1. [§4 (Dataset and Empirical Findings)] §4 (Dataset and Empirical Findings), the pre-freeze drain statistics: the claim that the observed 7.3% USDT and 18.7% USDC pre-freeze drains result from sanction-evasion races is load-bearing for the conclusion that ordering power is sanctioning power. However, without controls or methodology to exclude alternative explanations (e.g., voluntary transfers or timing issues), this attribution risks confounding, as the drains could occur independently of MEV competition.
minor comments (2)
  1. The abstract and introduction could more explicitly state the exact criteria used to determine 'drained to zero' and the temporal alignment with freeze transactions.
  2. [Model section] Clarify any assumptions in the game-theoretic model regarding costs and how they lead to the specific conclusions about participation.

Simulated Author's Rebuttal

1 responses · 0 unresolved

We thank the referee for their detailed review and for identifying a key point of methodological rigor in our empirical analysis. We address the concern about potential confounding in the pre-freeze drain statistics below and outline revisions to strengthen the attribution.

read point-by-point responses

  1. Referee: [§4 (Dataset and Empirical Findings)] §4 (Dataset and Empirical Findings), the pre-freeze drain statistics: the claim that the observed 7.3% USDT and 18.7% USDC pre-freeze drains result from sanction-evasion races is load-bearing for the conclusion that ordering power is sanctioning power. However, without controls or methodology to exclude alternative explanations (e.g., voluntary transfers or timing issues), this attribution risks confounding, as the drains could occur independently of MEV competition.

    Authors: We agree that careful attribution is essential and that alternative explanations such as voluntary transfers or unrelated timing must be addressed explicitly. Our dataset construction identifies sanctioned addresses via on-chain blacklist events and tracks balance changes in the blocks immediately preceding each freeze transaction. We document an escalation in evasion tactics—from issuer out-of-gas failures to public gas auctions, private order flow, and direct block-producer payments—which are inconsistent with random voluntary activity and align with MEV competition for ordering priority. To further mitigate confounding, we will add a new subsection in §4 that (1) restricts the primary statistics to drains occurring within a narrow temporal window (e.g., 10 blocks) of the freeze attempt, (2) reports robustness checks excluding addresses with prior high-frequency activity that might indicate routine transfers, and (3) discusses the economic implausibility of systematic voluntary drains timed precisely to sanctions. These additions preserve the core 7.3% / 18.7% figures while clarifying the evidentiary basis for linking drains to sanction-evasion races. The game-theoretic model in §5 provides independent support for the necessity of ordering-market participation, reducing reliance on any single empirical statistic. revision: partial

Circularity Check

0 steps flagged

No circularity: dataset motivates, game model derives independently from incentives

full rationale

The paper first assembles an empirical longitudinal dataset of on-chain sanctions and pre-freeze drains for USDT/USDC (7.3% and 18.7% zeroed addresses). It then applies standard game-theoretic reasoning to a model of issuer vs. evader competition for block priority. No equation or result is obtained by fitting a parameter to the observed drains and relabeling the fit as a prediction; the model conclusions (compliant issuers cannot abstain, MEV tax rises with penalties) follow directly from the incentive structure and participation costs without reference to the specific dataset values. No self-citation chain, uniqueness theorem, or ansatz is invoked to close the derivation. The empirical observations serve only as motivation and illustration, not as definitional inputs or fitted constraints that force the theoretical outcome.

Axiom & Free-Parameter Ledger

0 free parameters · 1 axioms · 1 invented entities

The central claim rests on the assumption that ordering is determined by economic incentives and that the dataset accurately captures pre-freeze drains.

axioms (1)
  • domain assumption Block producers act to maximize their revenue from transaction ordering
    Central to the MEV extraction claim in the abstract.
invented entities (1)
  • Sanction-Evasion MEV (SE-MEV) no independent evidence
    purpose: To describe rents extracted by block producers from sanction races
    Introduced as a new concept in the paper.

pith-pipeline@v0.9.0 · 5653 in / 1106 out tokens · 43731 ms · 2026-05-14T21:59:20.094635+00:00 · methodology

discussion (0)

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