Crypto Users Appeal US Sanctions Against Tornado Cash, Warn of ‘Troubling Implications’
Six users of the virtual currency mixer Tornado Cash are appealing a U.S. court decision that upheld sanctions against the cryptocurrency service, saying the Treasury Department illegally stretched its authorities “beyond recognition” when it designated Tornado Cash last year. The six people argued that U.S. sanctions laws don’t allow Treasury to designate an “open-source software project” like Tornado Cash because it doesn’t meet the definition of “property” under the International Emergency Economic Powers Act.
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In an appeal filed this month, Tornado Cash users Joseph Van Loon, Tyler Almeida, Alexander Fisher, Preston Van Loon, Kevin Vitale and Nate Welch asked the U.S. Court of Appeals for the Fifth Circuit to reverse an August ruling by a federal district court in Austin, which said Tornado Cash has a legal property “interest” in the “immutable smart contracts” it offers and can be subject to sanctions.
OFAC “has stretched that authority beyond recognition to prohibit transactions involving ownerless, immutable software code,” the appellants said. “If the decision below were allowed to stand, the Department’s authority would be nearly limitless.”
The six plaintiffs first sued Treasury in September 2022, days after OFAC added Tornado Cash to its Specially Designated Nationals List for being used to launder more than $7 billion worth of virtual currency, including on behalf of Lazarus Group, a North Korean hacking group (see 2208080031). The appellants said they used Tornado Cash for benign purposes, including to anonymously donate to Ukraine’s government or to prevent hackers from tracking investments.
Among other arguments, they said the sanctions designation “exceeded” Treasury’s authority under IEEPA and the North Korea Sanctions and Policy Enhancement Act.
The district court disagreed, saying Tornado Cash can be defined as a “‘national’ and a “person” under IEEPA and the Korea Act, and it has an “interest” in property in the immutable smart contracts it offers, which are autonomous pieces of code that can be deployed on blockchain networks.
The six Tornado Cash users challenged this ruling, arguing those smart contracts are stored on a public network and aren’t any one person’s or entity’s property and therefore can’t be sanctioned. “The only smart contracts at issue in this case are a subset of the designated smart contracts that are immutable -- meaning that no person can delete them, edit them, or control them in any way,” they said.
Although some “bad actors” have used Tornado Cash, including to aid the North Korean government, “the vast majority of the software’s users are ordinary people like plaintiffs who seek online privacy for entirely legitimate transactions,” the appellants said. “As a result of the Department’s designation, those law-abiding Americans cannot use the software to safeguard their privacy without threat of criminal sanctions.”
The six people argued that Tornado Cash isn’t a “national” or “person” because “it is neither a natural person nor a group of individuals who have demonstrated an agreement to further a common purpose.” The smart contracts also aren’t property because “they are incapable of being owned,” they added, also saying Tornado Cash “has no legal, equitable, or beneficial ‘interest’ in those immutable smart contracts; at most, it is well-positioned to profit from use of the immutable, open-source code.” They said the sanctions designation is illegal and violates the Administrative Procedure Act.
The Tornado Cash users also said allowing the sanctions designation to stand could set a dangerous precedent, adding that “it would deprive” the definitions of “entity,” “property,” “interest” and other “statutory terms of all meaning.”
“The Department’s newfound assertion of power over ownerless, immutable software code has troubling implications,” the appellants argued. “With the district court’s unprecedented ruling that the immutable smart contracts are property, it is hard to see why other intangible concepts could not be forbidden as well.”