Federal court upholds OFAC designation of Tornado Cash

On August 17, 2023, Judge Robert Pitman of the federal district court for the Western District of Texas granted summary judgment for the US Treasury Department in a case brought by users of Tornado Cash, a so-called cryptocurrency mixing service that allowed users to obscure the movements of cryptocurrency on the blockchain.

The order affirms a decision by the Treasury Department’s Office of Foreign Assets Control (OFAC) to add Tornado Cash to its Specially Designated Nationals list. Being added to the Specially Designated Nationals list means that Tornado Cash would be effectively inaccessible in the US. According to OFAC, Tornado Cash had been used to launder money cybercriminals had stolen in high-profile hacks, including $455 million stolen by the Lazarus Group, a DPRK-affiliated hacker ring.

In their challenge, the plaintiffs alleged that OFAC violated the Administrative Procedures Act, the First Amendment’s Free Speech Clause, and, the Fifth Amendment’s Takings Clause as to a few plaintiffs whose virtual currency was effectively trapped in Tornado Cash pools. In a 24-page Order, Judge Pitman rejected each of these arguments.

First, the plaintiffs had argued that OFAC has no authority to designate Tornado Cash because it is not a “person” or “property” within the meaning of OFAC’s authorizing statute. According to the plaintiffs, Tornado Cash is an open-source, decentralized, immutable system of self-executing smart contracts that is not owned by anyone. The court rejected this argument finding that Tornado Cash’s DAO (decentralized autonomous organization) which is responsible for maintaining and upgrading Tornado Cash and receives revenue from its operation, is an “association” which counts as a “person” under the statute. Further, the court found that the Tornado Cash DAO has a property interest in Tornado Cash’s smart contracts because, by design, the DAO benefits from use of the protocol. Thus, Tornado Cash was within OFAC’s authority to designate.

Next, the court rejected the plaintiffs’ argument that the designation chills constitutionally protected free speech. The plaintiffs had provided examples of users making political contributions through Tornado Cash, such as one plaintiff’s donation to Ukraine made through Tornado Cash so his contribution would be anonymous. The court faulted the plaintiffs for failing to adequately explain how their speech was chilled given the abundance of alternative means to support causes anonymously. Though the plaintiffs argued that the availability of expression in other forums cannot justify restriction of expression in a given forum, the court limited that principle to physical forums only. The plaintiffs also raised an argument that the designation would chill publishing source code which is protected speech. Rejecting this argument, the court held that OFAC’s restriction was limited to using code to effect transactions. Using the code in other ways was, in the court’s view, unrestricted and therefore posed no First Amendment issue.

Finally, the Court declined to consider the plaintiffs’ Takings Clause argument, finding it abandoned for failure to raise it in their motion.

In a post on X (formerly Twitter), Coinbase Chief Legal Officer Paul Grewal indicated that Coinbase would support appellate review in the Fifth Circuit Court of Appeals.