Appeals court rules against OFAC, says Tornado Cash sanctions unlawful

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In another big win for the crypto industry, a panel of federal judges last night sided with Tornado Cash users. They ruled the US Treasury Department unlawfully sanctioned the cryptocurrency mixing service back in 2022.

There’s nothing like a rare loss for the government heading into a long holiday weekend.

A quick refresher: The Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash in August 2022, claiming the mixer had been used to launder more than $7 billion in cryptocurrency.

In September 2022, six Ethereum blockchain users (with financial backing from Coinbase) filed a lawsuit against OFAC challenging its authority to designate Tornado Cash as a specially designated national (SDN). A Texas federal judge eventually sided with the Treasury, ruling in September 2023 that the sanctions were permitted, as “person” is defined as an “individual or entity.”

Coinbase and the Tornado Cash users appealed the decision to the Fifth Circuit Court of Appeals, which brings us to last night’s ruling.

Judge Don Willett — one of three circuit judges on the panel — wrote that Tornado Cash, which operates by executing immutable smart contracts, cannot be considered “property.” It is therefore outside OFAC’s authority, he added.

The Treasury has not yet commented on the decision or revealed whether or not it intends to appeal, in which case the Supreme Court could weigh in.

Willett did concede that there are “real-world downsides of certain uncontrollable technology falling outside of OFAC’s sanctioning authority.” But even so, he added, Congress is responsible for updating the legislation.

Tuesday’s decision notably follows a loss in another Tornado Cash-related case. A bid from Tornado Cash co-founder Roman Storm to dismiss the US government’s case against him was denied last September. Judge Katherine Polk Failla rejected the defense’s narrative that the founders were being targeted simply for “writing code.”

“As I understand the charges in the indictment, the Tornado Cash enterprise was not an altruistic venture,” Failla added during a telephone conference in September. “Among other things, the indictment alleges that Mr. Storm and other Tornado Cash founders solicited approximately $900,000 in financing from a venture capital fund in exchange for an expectation that the funds would receive a share of future profits from the Tornado Cash service.”

Two Tornado Cash founders, Storm and Roman Semenov, were charged in August 2023 with money laundering and sanctions violations related to their role in creating the mixing service. Storm is scheduled to be arraigned on Dec. 9, according to a scheduling ruling earlier this month. However, the latest development in the case against OFAC could impact this timeline and/or the charges.

Storm’s legal team did not immediately respond to our requests for comment. That’s not shocking, given that it’s Thanksgiving Eve and a late-night ruling from a higher court may have just upended the entire case.

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