It will not be easy to remove sanctions on Crypto Mixer Tornado Cash

by Arthur · October 27, 2022

Efforts to be removed from the Treasury’s sanctions list can be costly and time-consuming, and they often fail, sanctions lawyers said. While crypto advocates and companies argue that Tornado Cash’s sanctions infringe on individual rights to privacy — an important issue for the nascent industry — crypto experts said Tornado Cash may not be the best test case for that argument.

Tornado Cash, a currency mixer that allows users to mix their money to obscure ownership, was sanctioned in August by the Treasury’s Office of Foreign Assets Control, which enforces US sanctions. OFAC accused Tornado Cash of allowing users to launder billions of dollars in virtual currency, including $455 million allegedly stolen by North Korean hackers. The sanctions froze US assets held by Tornado Cash and barred US companies and individuals from doing business with them.

In September, the Treasury said that Tornado Cash’s website had been deleted from the internet, but that it remained accessible through certain internet archives. Dutch authorities said in August they had arrested a suspected developer of Tornado Cash in Amsterdam, alleging the 29-year-old was involved in hiding criminal transactions and facilitating money laundering through the platform.

After the sanctions were unveiled, Tornado co-founder Roman Semenov said on Twitter: “The Tornado Cash community is trying its best to ensure it can be used by good actors by, for example, providing compliance tools.”

Coin Center, a Washington, DC-based crypto research and advocacy group, along with three individuals filed a lawsuit this month challenging the sanctions. The suit alleges that OFAC does not have the statutory authority to impose sanctions against Tornado Cash, a platform based on open source, self-executing software protocols, and that the action against it violates Americans’ privacy and First Amendment rights.

Publicly traded Coinbase, one of the most popular US crypto exchanges, said in September it was funding a civil suit asking a Texas judge to force the Treasury Department to reverse sanctions against the Tornado Cash platform. The suit contains arguments similar to Coin Center’s.

Jorge Pesok, legal director at the HBAR Foundation, a crypto-focused nonprofit not involved in the lawsuits, said he saw the reasoning behind both sides of the case. While he believes the legal arguments brought in the case are valid — that sanctioning Tornado Cash was an attack on privacy rights and that the Treasury Department may have overreached — the platform has been used for bad things, he said. “Courts are influenced by facts; The facts here are bad, he said.

Generally, there are two ways for an individual or entity to get off a sanctions list, according to Cari Stinebower, a partner at law firm Winston & Strawn LLP who specializes in sanctions and anti-money laundering compliance. One is to show that OFAC has made a mistake. The other way, which is more common, is to show that the grounds for sanctions no longer apply, she said.

When individuals sue OFAC, they usually do so because they are frustrated and have tried other avenues, such as trying to obtain a license from OFAC that allows certain activities that would otherwise be prohibited, according to Stinebower. But these suits usually fail, she said.

“There is so much respect for the government’s actions,” she said. “The assumption is that they act correctly.”

The lawsuits in the Tornado Cash case are unusual and there is little precedent to indicate how long they might take, according to Jeffrey Alberts, a partner who specializes in white-collar crime and financial technology at the law firm Pryor Cashman LLP.

The outcome of the lawsuits could potentially clarify OFAC’s legal authority and affect compliance practices, Alberts said. Other participants in the decentralized finance industry have expressed similar concerns about OFAC’s power to sanction Tornado Cash.

One question, Mr. Alberts said, is whether OFAC could sanction smart contracts — programs that automatically move crypto around based on rules enshrined in computer code — or a blockchain token by arguing that the projects were used by bad actors who threaten national security.

“Hopefully these questions will be answered soon,” he said. “For now, the Treasury Department has introduced more unpredictability into the future of blockchain.”