Crypto Mixer Tornado Cash Loses Lawsuit Over US Sanctions

Olga Kharif, Bloomberg News

A company logo at the Coinbase Global Inc. event in Bengaluru, India, on Thursday, April 7, 2022. Coinbase, the U.S. cryptocurrency exchange operator, plans to more than triple its number of employees in India this year to around 1,000, according to Armstrong. Photographer: Samyukta Lakshmi/Bloomberg , Bloomberg

(Bloomberg) -- A federal judge denied a motion supported by crypto market participants including Coinbase Global Inc. which argued that the US Treasury Department exceeded its authority when sanctioning the coin mixing service Tornado Cash.

A year ago, Treasury’s Office of Foreign Assets Control (OFAC) accused Tornado Cash, a service that made it harder to trace digital-asset tokens, of laundering more than $7 billion of cryptocurrencies since its creation in 2019. The agency sanctioned crypto wallets associated with Tornado Cash, as well as related code known as smart contracts.

Judge Robert Pitman of the US District Court for the Western District of Texas denied requests for summary judgment from six individuals, including two Coinbase employees, who claimed the Treasury overstepped its bounds when seeking to block financial transactions benefiting foreign terrorists.

The plaintiffs in the Coinbase-funded lawsuit alleged that the department’s actions ended up ensnaring law-abiding Americans who were conducting legitimate legal commerce through the privacy-focused service. The judge said that the agency’s determinations were valid.

Digital-asset research firm Chainalysis said earlier this year that it had linked nearly $2 billion in crypto stolen in 2022 to North Korean hacking groups. Further, according to Chainalysis, these groups relied almost exclusively on Tornado Cash to launder the stolen funds.

Read: Crypto Thefts Hit Record $3.8 Billion on North Korean Hacks

Coinbase argued that Treasury overstepped its authority in sanctioning smart contracts — a key technology used throughout the crypto ecosystem to automate actions such as coin exchanges. It argued that such designation would cool investments throughout crypto. Pitman said that “OFAC’s determination that the smart contracts constitute property, or an interest in property, is not plainly inconsistent with the regulatory definition of those terms.”

The judge compared smart contracts with vending machines, a technology also operating somewhat independently of humans.

“This reinforces the Court’s point,” the judge wrote. “Vending machines are examples of unilateral contracts. And like vending machines, a smart contract is a tool that carries out a particular, predetermined task. The fact that smart contracts do so without additional human intervention, like a vending machine, or that they are immutable, does not affect its status as type of contract and, thus, a type of property within the meaning of the regulation.”

Coinbase’s Chief Legal Officer Paul Grewal said the biggest US crypto exchange would support an appeal.

Read: Illicit Actors Drive Up Crypto Obfuscator Usage to Record High

(Adds additional detail on North Korean hacking groups in fifth paragraph)