A U.S. appeals court has ruled that the Treasury Department overstepped its authority when it imposed sanctions on the cryptocurrency mixer Tornado Cash in 2022. The department accused Tornado Cash of facilitating over $7 billion in the laundering of funds, a portion of which was reportedly linked to North Korean hackers. However, the court stated that the sanctions were not lawfully justified under federal law.
Tornado Cash is a cryptocurrency mixer—a type of software that anonymizes digital transactions. It helps users conceal the origin and ownership of their cryptocurrencies by pooling and shuffling deposits. The Treasury's Office of Foreign Assets Control (OFAC) has blacklisted Tornado Cash under the International Emergency Economic Powers Act (IEEPA), as it was alleged that it had been used for laundering cybercrime proceeds, among which is $455 million reportedly stolen by the Lazarus Group, a North Korean hacking group.
Court's Ruling and Key Arguments
This came about with a decision by a panel of three judges from the New Orleans 5th U.S. Circuit Court of Appeals. A spokesperson from the panel, Judge Don Willett, wrote, "The smart contracts forming Tornado Cash did not constitute 'property.'" Law puts the authorization of regulating the property to OFAC but held that because these were immutables and unchangeables, the codes could neither be owned nor controlled hence would exempt from sanctions.
The court acknowledged that the risks that technologies like Tornado Cash pose are legitimate, but it held that updating the law to address such issues is the job of Congress, not the judiciary.
The lawsuit challenging the sanctions was brought by six Tornado Cash users with the financial support of Coinbase, a major cryptocurrency exchange. The court's decision was called a "historic win for crypto and liberty" by Paul Grewal, Coinbase's chief legal officer. Coinbase had argued that sanctioning an entire technology could stifle innovation and harm privacy rights.
Legal Troubles for Tornado Cash Developers
Despite the court ruling, there are still legal problems for those associated with Tornado Cash. In May, developer Alexey Pertsev was sentenced to over five years in prison in the Netherlands for money laundering. Founders of Tornado Cash, Roman Semenov and Roman Storm, are also charged with money laundering and sanctions violations in the United States.
The Bigger Picture
This case, therefore, underlines the legal and ethical challenges of privacy-focused technologies such as cryptocurrency mixers. It also calls for updated regulations to balance innovation, privacy, and security in the digital age.
