In a landmark ruling that immediately incensed the crypto community, a US judge has clarified that as a matter of law, control of money is not a prerequisite for operating a money transmitter.

Specifically, business operators may not disclaim responsibility for Bank Secrecy Act (BSA) requirements simply because they avoid controlling money during its transmission.

The decision has significant implications for the crypto industry, particularly for the legal cases involving Tornado Cash and Samourai Wallet.

In an oral ruling on Thursday, a US District Court judge for the Southern District of New York settled this hotly contested issue in the government’s favor. Crypto industry defendants believed that business operators must control money in order to transmit money. The government has argued for years, and repeated in an April 26 filing, that control of funds is not a statutory requirement.

“If Congress had intended that control of the funds was a requirement, it could have said as much in the plain text of the statute. It did not,” explained US Attorneys. This argument prevailed.

Tornado Cash, Samourai, and money transmission requirements

Thursday’s decision is terrible news for Tornado Cash and Samourai co-founders facing criminal charges for their alleged BSA violations.

Both defendants had argued that they did not control the coins within their mixing services and therefore could not be designated as money transmitting businesses.

Judge Katherine Polk Failla disagreed, allowing the government’s case against them to proceed.

In explaining her ruling, the judge further noted that ‘control’ of funds while transmitting money is just one of four distinct tests that courts use to determine the applicability of BSA requirements to a seemingly money-transmitting business.

Four qualities of a money transmitter

1. Accepting funds: Whether the business accepts money or value from customers.
2. Transmitting funds: Whether the business moves money or value between locations or persons.
3. Control of funds: Whether the business has control over the funds during the transmission process.
4. Providing instructions for funds: Whether the business instructs other entities to make funds available to recipients.

US prosecutors have argued that crypto services like Tornado Cash and Samourai were unlicensed money transmitting businesses whose founders have violated BSA and 31 U.S. Code § 5330 requirements such as sanctions enforcement. Prosecutors used the formal, legal definition of money transmitting business when classifying Tornado Cash and Samourai.

Because Thursday’s oral ruling does not yet have a written opinion from the judge, more clarification will arrive soon from the Southern District of New York once her order is signed and filed.

Pro-crypto defenders like Amanda Tuminelli and Jake Chervinsky of the DeFi Education Fund have voiced disappointment, viewing it as a potential threat to software developers’ free speech.

Read more: DoJ claims Tornado Cash indictment is not about ‘free speech’

The ruling is a significant clarification of a contentious area of law. For now, the law of the land is that money transmitters do not necessarily need to control funds during their transmission. Defendants intend to appeal the ruling.

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Bitcoin privacy and coin mixing service Samourai is having a big week in court, with both co-founders facing charges of conspiracy to launder money and conspiracy to operate an unlicensed money transmitter in the Southern District of New York.

William Lonergan Hill and Keonne Rodriguez are accused by the FBI of facilitating at least $100 million worth of money laundering transactions for illegal operatives. 

Although the two men appeared together in a US courtroom for the first time this week, there wasn’t much legal action of consequence. Nevertheless, proceedings in another coin mixer case involving are set to have a significant bearing on Samourai’s defense.

First things first, the duo opened their day on Wednesday in front of the judge to request a delay of their trial date. They asked for more time to review several terabytes of discovery data that they received less than five weeks ago.

Despite characterizing the size of the data through metaphors like “to the moon and back 22 times” or “75% of the amount of information in the Library of Congress,” the judge denied their request and scheduled a follow-up hearing to discuss the data for December 17 at 10am.

Rodriguez also requested freedom from home detention and his physical geolocation tracker, however, the judge denied this request.

Read more: Who are Samourai Wallet’s Keonne Rodriguez and William Lonergan Hill?

Control of user funds: Precedent from Tornado Cash

Despite the topic of Samourai’s control of users’ funds not coming up during this week’s court proceedings, because Tornado Cash and Samourai were similar privacy and coin mixing services, some of their legal issues overlap.

Specifically, whether Tornado Cash or Samourai ever controlled their users’ funds while transmitting them is a critical legal issue.

By deciding an issue in the Tornado Cash case (U.S. v. Roman Storm and Roman Semanov), US District Court Judge Katherine Polk Failla will set precedent over whether Samourai’s ‘control’ (or lack thereof) of its users’ coins was a prerequisite for its operation of an unlicensed money transmission business.

For context, Hill and Rodriguez argue that they never controlled users’ bitcoin through Samourai, supposedly making it impossible for them to have transmitted money that they never controlled in the first place. The FBI disagrees, arguing emphatically that control of money is not a prerequisite of money transmission.

Roman Storm is on a $2 million bond to appear in court on November 30. By that date, legal experts anticipate that Judge Failla will announce her decision over the contentious ‘control’ issue in the Tornado Cash proceeding.

If Judge Failla decides that control is a prerequisite for money transmission, it will be a win for Samourai. If the judge decides that control is not a prerequisite, Samourai’s co-founders’ arguments that they never controlled users’ funds will lose a substantial portion of its defensive power.

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During oral arguments this week related to an appeal of the US Treasury’s designation of Tornado Cash as a sanctioned entity, a US circuit judge revealed an embarrassing detail.

On Tuesday, in a live proceeding of the appeal of that designation, Van Loon et al. v. U.S. Department of the Treasury et al., Judge Kurt Engelhardt asked lawyers why the US Treasury was only able to cite three examples of illicit use out of the millions of Tornado Cash transactions.

As reported by Law360, these three examples are not just small in the context of Tornado Cash’s enormous volume. Worse, these three justifications for the US Treasury’s designation of Tornado Cash might be even more embarrassing for another reason: A separate, pre-existing sanction might have prevented them.

All three transactions involved North Korea laundering financial assets in violation of pre-existing US Treasury sanctions. Indeed, North Korea has been a sanctioned entity since 2006 — formally, a Specially Designated National — prior to the addition of Tornado Cash to that sanctions list in August 2022.

Therefore, Judge Engelhardt specifically asked why North Korea’s pre-existing sanctions were insufficient for the legal purpose of preventing the illicit use Tornado Cash, especially if the US Treasury was only able to cite three examples involving North Korea.

To be clear, an entity that fails to prevent sanctions violations might itself become sanctioned. For example, the US Treasury might sanction a bank that attracts Iranian or Venezuelan money launderers, even though Iran and Venezuela are already sanctioned.

However, at least one judge in the three-judge panel for the Fifth Circuit is questioning whether a separate sanction was needed for Tornado Cash.

Read more: Coin Center loses Tornado Cash lawsuit, intends to appeal

The case is ongoing.

Entirely separate from this appeal, the US government is criminally prosecuting the co-founders of Tornado Cash Roman Semenov and Roman Storm. According to an indictment, they conspired to launder money, operate an unlicensed money-transmitting business, and transact with sanctioned entities.

Storm is fighting the charges while Semenov remains at large.

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The US Department of Justice (DoJ) has explained why Tornado Cash founder Roman Storm’s motion to dismiss his criminal lawsuit has been inefffective.

The DoJ reiterated that its indictment has nothing to do with whether the computer code of Tornado Cash is free speech or otherwise Constitutionally protected by the First Amendment.

“The defendant is not being prosecuted for posting computer code,” claimed the DoJ.

“Instead, he is being prosecuted for his use of it in furtherance of a profitable and illicit business.”

Indeed, there are many forms of speech – including spoken words – that the First Amendment does not protect. Criminal speech such as threats of violence are not protected by the First Amendment.

The US Constitution does not protect all speech

Similarly, DoJ explains that banks use computer code to process financial transactions. If that code executes the work of a money transmitter, as defined legally, then that code is not mere free speech and is, instead, computer code that humans must ensure is implemented in such a way as to not violate money transmission laws.

Tornado Cash was part code, part speech, part business, and altogether a human creation. Storm did not just publish code; he operated a business and made operational decisions for years.

Tornado Cash the protocol is not the same as Tornado Cash the business. Just because Tornado Cash had some open source code does not mean that all of Roman Storm’s actions involving that code as the Tornado Cash business owner are Constitutionally protected free speech.

The DoJ focuses on Storm’s purposeful actions. Specifically, prosecutors focus on his knowing operation of an alleged money laundering operation that provided him millions of dollars worth of personal profit for washing over $1 billion in alleged criminal proceeds.

Roman Storm faces criminal charges of conspiracy to commit money laundering conspiracy, conspiracy to operate an unregistered money transmitting business, and violations of the International Emergency Economic Powers Act.

For his part, Storm argues that at no time did he conspire with parties like North Korea’s Lazarus Group, which sent illicit funds through his coin mixer, apparently without his knowledge.

The free speech precedent of Bernstein v. DoJ

Storm is sticking with the argument that publishing open-source code is not a crime. His legal team will almost certainly cite Bernstein v. Department of Justice, an old lawsuit that forced the US government to modify its regulations regarding the “export” of encryption software onto the internet. Yes, there was a time when the US government categorized robust encryption software as a military-level “munition” and imposed regulations on publishing code online. Prior to Bernstein v. DoJ, publishing certain details regarding cryptographic security onto the internet required registration as a US munitions exporter.

Bernstein v. DoJ actually helped facilitate international e-commerce by making it possible to publish more open source code, which ultimately allowed the secure processing of online card payments.

Read more: Coin Center loses Tornado Cash lawsuit, intends to appeal

Storm claims that Congress passed an impermissibly vague law

Storm also alleges that DoJ’s charges against him are unconstitutionally vague, which prosecutors rebuffed in their opposition. DoJ counterargues that Storm’s complaints mostly claim that the language of a law passed by Congress is somehow unconstitutionally vague – which is not legally availing in Storm’s defense. Courts must operate under the assumption that acts of Congress are not impermissibly vague, per precedent set in the prestigious 2nd Circuit Court of Appeals case USA v. Houtar.

If Storm wants Congress to change a law, DoJ argues, he should write to his legally elected representatives. For now, it is the job of the executive branch of government, including DoJ, to enforce the written laws of Congress, the legislative branch of government.

Was violating clear sanctions an act of free speech by Tornado Cash?

DoJ also rebuffed Storm’s claim that he should not face indictment for exporting Tornado Cash software. DoJ is crystal clear in its memorandum, reiterating that its indicment “does not charge the defendant with exporting Tornado Cash software.”

Prosecutors clarified that the charge covers Lazarus Group’s sending of illicit funds from a known, sanctioned wallet belonging to Lazarus Group, which the DoJ argues Tornado Cash should have known about and attempted to prevent. The Department of the Treasury clearly and publicly added Lazarus Group crypto wallets to its sanctions list in 2022.

US district judge Katherine Polk Failla of the US District Court for the Southern District of New York will read DoJ’s opposition and decide whether to honor or dismiss Roman Storm’s motion to dismiss case number 1:23-cr-00430, USA v. Storm.

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Deposits to notorious crypto privacy tool (and hacker-favorite) Tornado Cash may be at risk after malicious code was reportedly introduced to certain user interfaces.

According to a report by ZeroTwoDAO, published on Sunday:

“If you have deposited to Tornado Cash using IPFS gateways (like ipfs.io, cf-ipfs.com, eth.link), your note would likely be exposed and the deposited funds are at risk.”

Read more: DeFi has rough weekend with Aave and Tornado Cash chaos 

The report goes on to explain that user interfaces hosted via the peer-to-peer Interplanetary File System (IPFS) contain ‘malicious javascript code’ that was introduced by pseudonymous community contributor Butterfly Effects in a governance proposal two months ago. 

Consequently, sensitive data about deposits made via IPFS-hosted user interfaces was leaked to a server owned by the exploiter, who could then use the information to steal other depositors’ funds.

The article gives as an example an Ethereum address that withdrew a total of 3,200 ETH (worth $10 million) on Friday, before redepositing the funds into Tornado Cash the following day.

This isn’t the first time that malicious code has made its way past Tornado Cash’s decentralized governance system, however. In May 2023, a governance attack threatened to hand over full control of the protocol before the hacker had a change of heart.

With Tornado Cash’s three core developers beset by legal issues, monitoring of governance proposals has been left to token holders.

In August 2022, the US Treasury sanctioned Tornado Cash and related addresses due to its use in money laundering operations and connections to the Lazarus Group of North Korean hackers. Within a month, funds locked in the protocol had dropped by 50%. 

Shortly after the announcement, developer Alexey Pertsev was arrested in the Netherlands. A year later, US-based Roman Storm and Roman Semenov were also charged with money laundering.

The team has received support from across the crypto community. However, efforts have been hampered by the nature of the sanctions.

Read more: Coin Center loses Tornado Cash lawsuit, intends to appeal 

What is a crypto mixer?

Tornado Cash is a crypto mixing service allowing users to obscure their funding source or the trail of their transactions, information which is otherwise publicly visible via block explorers.

While its supporters argue that mixers are legitimate tools to allow for privacy in an otherwise transparent financial record, they are also wildly popular with crypto hackers.

Since the protocol was slapped with sanctions, cashing out funds that have been ‘tainted’ by association with Tornado Cash has led many to avoid using the service. 

This includes the hackers, who are increasingly opting to fund their attacks through low-scrutiny exchanges, such as FixedFloat, which does not require users to pass know-your-customer (KYC) checks.

Ironically, FixedFloat itself was hacked for $26 million worth of crypto earlier this month.

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There is growing concern about the number of crypto hackers using centralized exchanges to fund their attacks.

In order to pay the transaction fees necessary to carry out attacks, hackers must first fund their wallets. However, given the transparency of a public ledger, they have to carefully consider how to do this without linking themselves to the crime.

Tornado Cash used to be the industry standard for covering one’s tracks, used by hackers and privacy advocates alike.

Now, it appears that in many cases, hackers simply opt to skirt their way around exchanges’ know-your-customer (KYC) procedures when funding their accounts.

Blockchain monitoring firm Forta Network’s analysis of funding sources for recent attacks shows that the hacker’s favourite Tornado Cash now represents just under half the hacks studied, with funds coming from centralized exchanges (CEXs) in a third of cases.

Other funding methods included novel privacy tool Railgun and ‘middleware operations software’ UnionChain, making up 6.7% apiece, as well as cross-chain swaps via Squid router, which accounts for 3.3%.

Read more: Explainer: What to know about crypto mixer Tornado Cash

The dataset is made up of addresses used in 30 recent flash-loan attacks, including November’s intricate $48 million hack of decentralized exchange KyberSwap, back-to-back attacks on Arbitrum projects Radiant Capital and Gamma Strategies, and a thwarted $1 million governance attack on NFT project Loot last month.

Although Tornado Cash remains the dominant source of funding for on-chain hacks, matters have been complicated for hackers trying to cash out after the US Treasury placed sanctions on the crypto mixing service in August 2022.

After the sanctions, addresses that have touched any ‘tainted’ funds originating from the mixer are generally flagged by exchanges, making it a poor choice when needing to convert any ill-gotten gains to fiat currency.

A recent article from 404 Media claims to have used a $15 AI-generated fake ID from a website named OnlyFake to pass KYC checks on OKX, the funding source of one of the attacks studied by Forta.

With these AI tools, there is no need to purchase stolen credentials, or ‘fullz’ on the darknet, hackers can simply generate an entirely new person, and all their corresponding documentation. 

Such a significant proportion of attacks being exchange-funded shows just how easy bypassing KYC has become, a trend that is likely to continue with more widespread use of similar tools.

Read more: Iranian crypto exchange Bit24 reportedly leaks 230,000 users’ KYC data

Although the hackers run the risk of the CEX blocking their funds, they might feel somewhat safer leaving less of a trail on-chain.

While dodging genuine KYC checks may present a problem to the crypto industry in on-ramping hackers, the problem is bound to affect many other industries. Ironically, the widespread use of cryptographic proofs, the technology underlying cryptocurrencies, may be the solution to these kinds of issues in the future.

However, for now, there are reasonable doubts over how seriously exchanges take their role and how stringent KYC controls really are.

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The Office of Foreign Assets Control (OFAC) added Tornado Cash to its ‘Specially Designated National or Blocked Person’ list in November of last year. Coin Center subsequently filed a lawsuit against Janet Yellen for the sanctions that OFAC applied against the crypto tumbler but that lawsuit has now been dismissed. 

Coin Center, in its suit, maintained that the addresses associated with the core non-upgradeable smart contracts that made up Tornado Cash weren’t appropriate targets for the sanctions.

One argument centered around whether or not the entity had sacrificed any interest in these contracts because they couldn’t be altered at this point. However, the court found that “TORN holders still have an indirect beneficial ‘interest’ in the use of the core software tool and the service as a whole because that increases the value of the TORN.” 

The court likewise rejected the argument that there was First Amendment protection for Tornado Cash, finding that “the designation of Tornado Cash does not preclude Plaintiffs…from spending money or donating money for political ends, nor does it preclude organizations from accepting anonymous donations.”

Neeraj Agrawal, who leads communications for Coin Center, took to X to express disappointment and explain that the firm intends to appeal the decision. 

Read more: Why didn’t the DoJ charge the third co-founder of Tornado Cash?

This case has represented a touchstone for transactional privacy advocates who worry that Tornado Cash is just the next step in a steadily increasing financial panopticon.

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The Financial Crimes Enforcement Network (FinCEN) published a notice of proposed rule making that would escalate the mixing of convertible virtual currencies to a “primary money laundering concern.” If implemented, these new and more stringent rules will impact not only dedicated tumblers like Tornado Cash but service providers that use basic privacy protocols like Bitcoin’s coinjoin.

FinCEN cited malicious actors’ use of crypto-mixing services to launder illicit proceeds. The bureau highlighted Hamas, Palestinian Islamic Jihad, Russian criminal groups, and the Democratic People’s Republic of Korea.

The Palestinian Islamic Jihad, for example, recently received millions of Tron-based USDT. Hamas reportedly received some $450,000 in digital asset donations which Israeli authorities have since seized.

The notice of proposed rule making explains FinCIN’s goals of greater compliance practices for coin mixers. It says heightened transparency will improve FinCIN’s ability to deny states like North Korea and other terrorist groups their access to US financial infrastructure.

FinCEN’s proposal could require financial institutions to keep records and reports relating to transactions involving digital asset tumblers. Simply put, the rule brings know your customer (KYC), anti-money laundering (AML), and combating the financing of terrorism (CFT) requirements to operators of crypto tumblers.

USA PATRIOT Act: Law since October 2001

As justification for its rulemaking, FinCEN cited Section 311 of the USA Patriot Act. Section 311 empowers the Treasury Secretary with the authority to classify “primary money laundering concerns” and require domestic financial agencies to take “special measures” against those entities.

Special measures for primary money laundering concerns include:

• Prohibiting the opening or maintenance of any correspondent or payable-through accounts
• Verifying purpose and source of funds for payments
• Recordkeeping and reporting requirements
• Beneficial ownership disclosures

Tornado Cash: A case study in crypto sanctions

Previously, authorities cracked down on mixers like Tornado Cash, which is already sanctioned in the US. The Office of Foreign Asset Control (OFAC) sanctioned Tornado Cash in August 2022.

Read more: US sanctions on Tornado Cash spark free speech protests

The Tornado Cash sanction, of course, proved highly controversial. Several digital asset insiders claimed it was unfair to honest users who simply want privacy. Many claimed the sanction violated their free speech rights.

Somebody used Tornado Cash to sprinkle ETH donations into the wallets of well-known figures like Vitalik Buterin, Brian Armstrong, and Jimmy Fallon — perhaps an attempt to draw them into the debate over whether OFAC’s actions amounted to an overreach of its authority. Even Vitalik Buterin suggested a potentially more regulatory-compliant alternative using ZK proofs in a paper he co-authored.

Tornado Cash’s volume declined by 85% shortly after OFAC imposed its sanction. However, the measures haven’t killed the service entirely. A recent Arkham report showed that $77 million in digital assets were sent through the Tornado Cash contract in a recent 30-day period. 

As an open-source protocol, Tornado Cash’s contract still operates on the Ethereum blockchain, making it more difficult for authorities to block entirely for as long as Ethereum is accessible.

However, the ability to access a tumbling service doesn’t necessarily mean that using it is legal. In theory, OFAC could pursue anyone who sends funds through a sanctioned coin tumbler, even though it may have some explaining to do if it were to go after Jimmy Fallon for receiving an unsolicited donation of ETH through Tornado Cash.

Coinjoin services put on 90-day FinCEN notice

FinCEN’s new notice of proposed rule making on digital asset mixing means that tumbling services like CoinJoin might soon become even more difficult to use legally. Moreover, operators depending on anonymizing services might have to collect, record, process, and disclose untold reams of data to the government.

Unless FinCEN receives a significant number of objections as formal comments during its public comment period, its proposed rules stand a good chance of becoming enacted by treasury secretary Janet Yellen.

Unsurprisingly, FinCEN justifies the new requirements by naming rogue users like Hamas and the Democratic People’s Republic of Korea. FinCEN has opened a comment period lasting 90 days after its recent publication of the notice of proposed rule making in the federal register.

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Tether, the issuer of crypto’s largest stablecoin USDT, stated this week that it won’t freeze funds associated with OFAC-sanctioned addresses unless specifically instructed to do so by law enforcement.

The company has a chequered history and has come under near-constant scrutiny over the assets backing its flagship stablecoin. Despite this, USDT has grown to be the industry’s de-facto digital dollar, with a market cap of almost $70 billion, down from a high of over $80 billion before the two early summer crypto market crashes.

Now, Tether’s decision not to freeze USDT in addresses linked to the anonymity tool Tornado Cash stands out when compared to many other entities who rapidly implemented blacklists.

While Tether and its closest rival Circle — which immediately froze funds directly on-chain — blacklist at the contract level, most projects are simply applying blacklists to the front-end. This seems unlikely to deter dedicated money-launderers or blackhat hackers, given that the underlying smart contract functionality remains unaffected.

Since the sanctions, many projects have been accused of over-compliance by privacy advocates. Blocked addresses reportedly include whitehat hackers, victims of hacks, and those targeted by “dusting” attacks simply due to their proximity to the banned addresses.

However, it’s clear why so many are keen to stay far away from any perceived sanctions violation. The arrest of Tornado Cash developer Alexey Pertsev in the Netherlands appears to have rattled the commitment to anti-censorship of other devs in the industry.

Read more: Algorithmic stablecoin collapse may crash crypto markets again, says IMF

Tether opting to hold off on freezing funds is as close as any large player has come to taking a stand against the sanctioning of a privacy tool used by many legitimate users to protect privacy. 

That being said, this week’s statement stresses the close relationship the company has with law enforcement and, if instructed to freeze addresses, Tether’s compliance does not seem in doubt.

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On August 8, 2022, the US sanctioned Tornado Cash. According to the announcement by the US Treasury, this means that “all property and interests of Tornado Cash that are in the United States or in the possession or control of US persons are blocked and must be reported to OFAC.”

In addition, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.”

The Office of Foreign Assets Control (OFAC) of the US Treasury cited the need to enforce anti-money laundering (AML) controls on criminal users of Tornado Cash, which include North Korea and their state-sponsored hacking department known as “The Lazarus Group.”

Since launching in August 2019, Tornado Cash has received over $7.6 billion worth of Ethereum. However, research carried out by Chainalysis suggests that the majority of funds received by Tornado Cash are from legitimate sources, and many libertarians and privacy advocates have decried the actions of OFAC, considering them an infringement on free speech.

Read more: Explainer: What to know about crypto mixer Tornado Cash

Although the majority of funds within Tornado may be from legitimate sources, the link between Tornado Cash and on-chain criminal activity is undeniable. 

In its post-mortem report, blockchain security firm Slowmist estimated that Tornado Cash has mixed $2.2 billion worth of ETH during the first half of 2022. 

Of the transactions that Slowmist identified to be money laundering, three-quarters of these passed through Tornado Cash. Its native token, TORN, plummeted in the wake of OFAC’s sanctions, but the impacts have also been felt offline.

Tornado Cash developer arrested

Just two days after the OFAC announced its sanctions, Dutch authorities arrested developer Alexey Pertsev for his alleged role in creating Tornado Cash. It’s alleged that he facilitated money laundering through the Tornado Cash protocol and enabled the concealment of illicit cash flows.

FIOD responded to queries about the arrest of Pertsev, stating that although simply writing code can be considered free speech and isn’t illegal per se, writing code such as that of Tornado Cash, which it claims to be “for the sole purpose of committing criminal acts” is illegal.

Authorities don’t address the fact that Tornado Cash also processes legitimate funds, or that the sanctions have impacted innocent users. 

Forty-six (and counting) unique cryptocurrency addresses have been included as identifiers in the sanctions. The accuracy of these inclusions has been questioned by some in the industry, as donation addresses from charitable organizations such as Gitcoin are also on the list, creating an uncertain legal situation for those who have previously donated to Tornado Cash through Gitcoin.

Gitcoin has since removed the Tornado Cash donation page, and other websites are also being forced to distance themselves from the platform.

Free speech and privacy advocates criticize Tornado Cash sanctions

The Tornado Cash sanctions and arrest of Alexey Pertsev have drawn criticism from a wide range of industry experts.

• Max Bernstein of the DeFi Education Fund told Decrypt, “Tornado Cash was routinely used for legitimate purposes… Writing and publishing code must be protected in free societies and privacy is not a crime.”
• Kraken CEO Jesse Powell called the sanctions unconstitutional. He argued that expressing code is tantamount to First Amendment-protected “speech,” and that legitimate users who desire privacy for legal purposes also utilize Tornado Cash. Powell expects a legal challenge to the sanctions.
• Digital asset lobbyist Coin Center is considering an administrative or legal challenge and expressed interest in communicating directly with OFAC. Coin Center cited potential violations of due process and First Amendment rights. 
• A member of the Tornado Cash DAO proposed raising funds to pursue legal actions. However, the Tornado Cash community website went down in the face of the sanctions, making the proposal difficult to view.
• Other community members suggested forking the Tornado Cash code and building a different website to access it, which would reduce liquidity but provide a legal loophole for users to access a similar product.

There are certain historical cases that may be used in the defense of Tornado Cash.

Precedent for a First Amendment legal challenge

The plaintiffs in any potential court case could cite a previous counter lawsuit in which then-undergrad student Daniel J. Bernstein fought back against the Department of Justice.

The Department of Justice was attempting to force him to register as an arms dealer or obtain a license to publish his work on a data encryption algorithm called “Snuffle.”

The Ninth Circuit Court of Appeals ruled in Bernstein’s favor on First Amendment grounds, allowing the argument that free speech rights apply equally to code.

Speaking to a related, non-Tornado Cash issue, Coinbase CEO Brian Armstrong suggested he would prefer not to block transactions to and from sanctioned addresses once Ethereum switches to a purely Proof-of-Stake (PoS) algorithm. He said he would rather end Ethereum staking on Coinbase’s platform than comply with such sanctions. However, he also suggested that a legal challenge to OFAC’s sanctions could lead to a better outcome.

Forcing Tornado Cash free speech onto celebrities

In a protest meant to highlight the inaccuracy of the OFAC sanctions, one user dusted the wallets of various celebrities with “dirty” Ethereum that had been sent through Tornado Cash. The wallets belonged to high-profile individuals in the digital asset community, including Vitalik Buterin, Brian Armstrong, Jimmy Fallon, and prominent NFT artist Beeple.

This “dusting” activity forces users who never intended to use the protocol to become technically susceptible to sanctions violations. In Ethereum, as with most blockchains, recipients of funds cannot deny a funds transfer. Once someone sends money to a wallet, a recipient cannot reject it.

Circle’s CENTRE Consortium froze $100,000 in USDC from addresses listed by Treasury as Tornado Cash interactives. On-chain exchange dYdX also banned accounts with funds traced back to Tornado Cash. (dYdX then unbanned some of those accounts, saying compliance vendors had wrongly flagged them with Tornado Cash.)

The Tornado Cash case has been the highest profile case of its kind, but it isn’t without precedent. In May of 2022, OFAC brought similar sanctions onto blendr.io, a Bitcoin mixer that also received funds from the Lazarus Group.

Following these events, users report that centralized organizations such as FTX are now distancing themselves from similar privacy-preserving platforms, suggesting that they believe this crackdown will continue.

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