A federal court has affirmed the U.S. Treasury Department’s authority to impose sanctions on Tornado Cash, a well-known cryptocurrency mixing service, rejecting a legal challenge brought by six users of the platform. The decision, presided over by U.S. District Judge Robert Pitman, sided with the government on all claims, granting summary judgment in the case and affirming the Office of Foreign Assets Control’s (OFAC) entitlement to cite Tornado Cash under sanctions statutes.
The lawsuit stemmed from the Treasury Department’s addition of Tornado Cash to its Specially Designated Nationals and Blocked Persons List in August of last year. Also, the service is accused of laundering more than $7 billion worth of virtual currency, including allegedly facilitating transactions for North Korean hackers.
The plaintiffs argued that the government’s action was unlawful as it violated the First Amendment, contending that they were denied the ability to engage in “socially valuable speech” through donations to political and social causes. Judge Pitman disagreed, stating that the plaintiffs “have not shown that the government’s action in any way implicates the First Amendment.”
A closer look at privacy, decentralization, and regulation in the crypto space
Tornado Cash’s argument focused on its definition as a “decentralized, open-source software project” made of smart contracts on the Ethereum blockchain. The court, however, found that Tornado Cash operates as an “association” that can be properly sanctioned as an entity under the International Emergency Economic Powers Act. The court also determined that smart contracts deployed by Tornado Cash constitute “property” subject to sanctions under OFAC’s broad regulatory definitions.
The ruling has broader implications for the crypto industry, particularly concerning privacy and decentralization. While crypto mixers like Tornado Cash are designed to grant extra privacy, the court’s decision highlights the regulatory challenges they face. Coinbase supported Tornado Cash’s appeal against the sanctions, emphasizing the distinction between benign users and bad actors.
Judge Pitman’s decision to turn down the lawsuit stated that Tornado Cash is indeed an entity with a property interest, and therefore OFAC’s sanctions do not qualify as governmental overreach. Unless further arguments are brought forth, Tornado Cash will remain on OFAC’s list, preventing the entity from doing business with the banking sector and various businesses.
The ruling also noted that the plaintiffs could have made a case that their inability to access Ethereum trapped in a Tornado Cash smart contract pool violated the Fifth Amendment. However, the plaintiffs did not pursue this claim, and it was waived.
Paul Grewal, chief legal officer at Coinbase, expressed continued support for the plaintiffs’ challenge, indicating that Fifth Circuit appellate review is required to resolve the issue.
