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Tornado Cash Sanctions Upheld: Smart Contracts Count as Property

Published August 21, 2023 2:18 PM
Teuta Franjkovic
Published August 21, 2023 2:18 PM
Key Takeaways
  • A court upholds US Treasury’s sanction rights on Tornado Cash, dismissing user lawsuit
  • Court backs Treasury’s stance: Tornado Cash laundered $7B in crypto
  • Coinbase’s CLO says they’ll support Tornado Cash plaintiffs’ arguments post-court ruling

In response to a legal appeal from Tornado Cash users, a federal judge backed  the US Treasury Department’s right to penalize the cryptocurrency mixer.

The Office of Foreign Assets Control (OFAC) is authorized to cite Tornado Cash in accordance with sanctions laws, District Judge Robert Pitman stated, siding with the government  on its claims.

Six plaintiffs asked for a summary judgment, but it was simultaneously denied.

Govt. Actions Didn’t Implicate the First Amendment – Judge

Tornado Cash users claimed that the government’s actions were illegal as they violated the First Amendment and that they had been denied the right to “socially valuable speech.”

Users said they planned to utilize Tornado Cash “to make donations to important political and social causes.”

Pitman disagreed  as the plaintiffs “have not shown that the government’s action implicates the First Amendment,” he said.

The US Treasury Department included the cryptocurrency mixing service to its Specially Designated Nationals and Blocked Persons List in August 2022, prompting the plaintiffs to launch a lawsuit.

It is believed that Tornado Cash helped North Korean hackers conduct transactions worth more than $7 billion in virtual money.

Tornado Cash, according  to Judge Pitman, functions as a “association” that can be legitimately recognized as a legal person under the International Emergency Economic Powers Act.

The court also found out  that under OFAC’s expansive regulatory definitions, Tornado Cash’ smart contracts qualify as a “property” subject to fines.

Joseph Van Loon, Tyler Almeida, Alexander Fisher, Preston Van Loon, Kevin Vitale, and Nate Welch are the six users to have brought the case to the court.

Coinbase Trusts Plaintiffs

The judge said the plaintiffs may have argued that the Fifth Amendment was “broken” by their inability to access Ethereum locked up in a Tornado Cash smart contract pool.

The Fifth Amendment forbids the government from taking property without just compensation.

However, Pitman also noted that the plaintiffs did not pursue their Fifth Amendment argument.

Coinbase, which is supporting the complaint, said it “continues to believe Plaintiffs’ challenge to OFAC’s Tornado Cash action is right” and backs the issues call for Fifth Circuit appellate review.

Paul Grewal, the chief legal officer of Coinbase, stated  on X:

According to the Treasury Department, fraudsters were using Tornado Cash to launder virtual currency, including money used to fund the North Korean regime.

“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,” the decision stated .

“OFAC also noted that the DPRK has become increasingly dependent on cybercrime to finance its WMD and ballistic missile programs.”

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