US Federal Court Denies Appeal To Lift Tornado Cash Sanctions

US Federal Court Denies Appeal To Lift Tornado Cash Sanctions

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US District Judge Robert Pitman has dismissed an appeal filed by six Tornado Cash users who sought to lift sanctions placed on the controversial cryptocurrency mixer. 

The United States Treasury’s Office of Foreign Assets Control had added Tornado Cash to its SDN list in August 2022, alleging it had enabled billions in illicit funds. 

Court Upholds Treasury Department’s Sanctions 

A federal court has upheld the Treasury Department’s decision to impose sanctions on cryptocurrency mixer Tornado Cash, throwing out the legal challenge brought by several users of the mixing service. The judge sided with the government and the Treasury Department on all of its claims and also granted summary judgment in the case. This reinforced the fact that the Treasury’s Office of Foreign Assets Control is entitled to sanction Tornado Cash under current sanction statutes. Furthermore, the court denied the summary judgment requested by the plaintiffs. The court filing stated, 

“The Court finds that Tornado Cash is an association within the ordinary meaning of the term and is, therefore, an entity that may be designated per OFAC regulations.”

The Plaintiff’s Argument 

The plaintiffs in the case, six users of Tornado Cash, had stated that the government’s action to sanction the cryptocurrency mixer was unlawful because it violated the first amendment. The plaintiffs argued that because of the decision, they were being denied the ability to engage in socially valuable speech. This is because they would have used Tornado Cash to donate to several social and political causes. 

However, Judge Pitman disagreed with this argument, stating that the plaintiffs had failed to show that the action taken by the government had, in any way, implicated the first amendment. The plaintiffs also pointed out that there is significant confusion regarding what Tornado Cash really is, stating, 

“The parties disagree on how to characterize Tornado Cash. Plaintiffs contend that Tornado Cash is a decentralized, open-source software project comprised of a subset of smart contracts, or “pools,” on the Ethereum blockchain.”

The plaintiffs also argued against classifying Tornado Cash as an association, claiming that the designation would exclude individual founders, developers, DAO members, and users involved in supporting the application. The plaintiffs asserted that Tornado Cash users rely on smart contracts that are immutable, autonomous, and self-executing. If Tornado Cash was recognized as an autonomous software instead of an association, it would be exempted from the SDN requirements. 

The OFAC has classified Tornado Cash as an entity that operates a cryptocurrency mixing service. It has also stated that the service was being used to launder virtual currencies, including those by the dreaded hacker group Lazarus. 

“OFAC determined that the DPRK’s malicious cyber-enabled activities threaten the United States and the broader international community and pose a significant threat to the international financial system. OFAC also observed that the DPRK has increasingly relied on cybercrime to generate revenue for its weapons of mass destruction and ballistic missile programs.”

Court Disagrees With Plaintiffs 

Judge Pitman concluded that Tornado Cash operates as an association and hence, can be sanctioned by the authorities as an entity under the International Emergency Economic Powers Act. The judge also determined that smart contracts deployed by Tornado Cash were subject to sanctions under regulatory definitions outlined by the OFAC. 

Interestingly, the judge also noted that the plaintiffs could have made a case stating that their inability to access Ethereum trapped in Tornado Cash smart contract pools violated the fifth amendment. The fifth amendment guarantees protection against the taking of any property by the government without fair compensation. However, the judge noted that the plaintiffs did not pursue their fifth amendment claim. 

“Plaintiffs did not pursue their Fifth Amendment claim, even after the government raised the issue of waiver in its cross-motion. Because Plaintiffs failed to pursue their Fifth Amendment claim, they have waived it.”

Coinbase Backing Lawsuit 

The chief legal officer at Coinbase, Paul Grewal, stated that the exchange continues to believe in the plaintiffs’ challenge against the OFAC action and that the issues require Fifth Circuit appellate review. Coinbase is also backing the lawsuit. 

“We continue to believe Plaintiffs’ challenge to OFAC’s Tornado Cash action is right. We’ve always known that Fifth Circuit review is required to resolve these issues, and we continue to support them on appeal.”

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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