Federal Court Affirms Sanctions on Tornado Cash: Cryptocurrency Mixer Faces Legal Setback

  • Federal Judge Pitman has affirmed the sanctions on Tornado Cash.
  • The sanctions came as a result of its role in laundering over $7 billion worth of crypto.

A Federal Court has taken sides with the United States Treasury Department over its authority and decision to sanction popular cryptocurrency mixer Tornado Cash over money laundering. Precisely, U.S. District Judge Robert Pitman affirmed that the court is supporting the government on its claims and rejected the legal battle filed by six Tornado Cash users including Coinbase employees.

These users were identified as Joseph Van Loon, Tyler Almeida, Alexander Fisher, Preston Van Loon, Kevin Vitale, and Nate Welch. They filed a lawsuit against the government on September 8th, 2022 following the enforcement action on Tornado Cash and requested for summary judgement. As part of their argument, they claimed the Treasury Department went too far with its decision to suspend financial transactions on the platform.

The Treasury’s Office of Foreign Assets Control (OFAC) discovered that cybercriminals including North Korean hackers, have used the crypto mixing platform to launder more than $7 billion in cryptocurrencies. Allegedly, these laundered funds were used to bankroll foreign terrorist organizations.

The action of the users of the crypto mixer was perceived as a threat to the United States and the global community. Also, it was regarded as a threat to the international financial system. Hence, Tornado Cash was added to the Specially Designated Nationals and Blocked Persons List. 

According to these users, the government’s action was unlawful and violated the First Amendment. To expand their argument, they claimed that they were prevented from making a socially valuable speech which would have seen Tornado Cash contribute to important political and social causes.

Tornado Cash: OFAC Has Not Violated First Amendment 

Judge Pitman strongly emphasized that OFAC is well within its jurisdiction to impose sanctions on the defaulting crypto mixer. The smart contracts deployed by Tornado Cash were classified as “property” which is subject to sanctions under OFAC’s broad regulatory definitions. 

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Additionally, Tornado Cash operates as an “association” which can face sanctions like an entity under the International Emergency Economic Powers Act. Judge Pitman also explained that the motion filed by the six Tornado Cash users has not demonstrated that the government’s action “implicates the First Amendment” just like they implied in their lawsuit. 

In his opinion, they would have made a case if they had said that their inability to access Ethereum (ETH) locked up in the mixer’s smart contract pool violated the Fifth Amendment. This is no longer possible as the government has already raised the issue of waiver in its cross-section and the request has been granted.

Noteworthy, the Fifth Amendment offers protection against the taking of property by the government without compensation. 

Coinbase has been a core supporter of the lawsuit against the government from its inception. Paul Grewal, the exchange’s chief legal officer confirmed that they believe the challenge to OFAC’s action is right and therefore, the issues require Fifth Circuit appeal’s later review.

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