Removing Sanctions on Crypto Mixer Tornado Cash Won’t Be Easy

27 October 2022

in HBAR

Reading Time: 4 mins read

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 contend that Tornado Cash’s sanctions infringe on personal rights to privacy—an important issue for the nascent industry—crypto experts said Tornado Cash might not be the best test case for that argument.

Tornado Cash, a currency mixer that lets users commingle their funds to obfuscate ownership, was sanctioned in August by the Treasury’s Office of Foreign Assets Control, which enforces U.S. 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 U.S. assets held by Tornado Cash and barred U.S. companies and individuals from doing business with it.

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

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

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Coin Center, a Washington, D.C.-based crypto research and advocacy group, along with three individuals filed a lawsuit this month challenging the sanctions. The suit argues that OFAC doesn’t have statutory authority to impose sanctions on Tornado Cash, a platform based on open-source, self-running software protocols, and that the action against it infringes on Americans’ privacy and First Amendment rights.

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Publicly traded Coinbase, one of the most popular U.S. crypto exchanges, said in September that it was financing a civil suit that asks a Texas judge to force the Treasury Department to reverse sanctions against the Tornado Cash platform. The suit includes arguments similar to Coin Center’s.

Jorge Pesok, chief legal officer at the HBAR Foundation, a crypto-focused nonprofit that isn’t involved in the lawsuits, said he saw the reasoning behind both sides of the suits. 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 may have overreached—the platform has been used for bad things, he said. “Courts are swayed by facts; the facts here are bad,” he said.

Typically, there are two ways for an individual or entity to come 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 reasons for sanctions no longer apply, she said.

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

“There is so much deference for the government actions,” she said. “The presumption is that they are acting appropriately.”

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 specializing in white-collar crime and financial technology at law firm Pryor Cashman LLP.

The outcome of the suits could potentially clarify OFAC’s legal authority and affect compliance practices, Mr. 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 can 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 that 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.”