U.S. Department of Treasury Designates Virtual Currency Mixer Tornado Cash

Washington, D.C. (November 10, 2022) – Virtual currency mixers blend different streams of cryptocurrency to provide privacy about the source of funds that are being transferred through the financial system. While not illegal, currency mixers are widely viewed as a mechanism used to facilitate money laundering. The U.S. Department of the Treasury is cracking down on these virtual currency mixers.

On August 8, 2022, Treasury's Office of Foreign Assets Control (OFAC) issued its second-ever designation of a virtual currency mixer, Tornado Cash, to the Specially Designated Nationals and Blocked Persons (SDN) List, which prohibits U.S. persons from dealing with listed companies or individuals and freezes all assets located within the U.S. According to Treasury’s press release, Tornado Cash has been used to launder over $7 billion since its creation in 2019. In the most recent development in these closely-watched events, in September and October, several Tornado Cash customers sued Treasury, claiming it exceeded its statutory authority in sanctioning the company.

The OFAC listing was imposed pursuant to Executive Order (E.O.) 13694 of April 1, 2015, which authorizes the imposition of sanctions on individuals and entities that are determined to be responsible for or complicit in cybercrimes. Section 6(b) of the E.O. defines the term “entity” as a “partnership, association, trust, joint venture, corporation, group, subgroup, or other organization.” This definition has become the center of the legal challenges, which question OFAC’s authority to sanction decentralized protocols like Tornado Cash under the E.O.

The September complaint, for example, argues that Tornado Cash is neither an individual nor an entity and therefore does not come under the authority of E.O. 13694. According to the lawsuit, “the Tornado Cash privacy protocol [consists] of perpetually self-executing code on the Ethereum blockchain that cannot be altered, edited, or otherwise controlled.” ¶ 45. Similarly, the October complaint states that “Tornado Cash is merely a widely available software tool, lacking agency and not controlled by anyone.” ¶ 88.

The September complaint also states that because Tornado Cash is neither a person nor the property of a person, Tornado Cash cannot petition for removal from the SDN List, leaving no clear pathway for the sanctions to be lifted. Therefore, both complaints allege that users who had funds in Tornado Cash prior to Tornado Cash’s designation are indefinitely prohibited from lawfully accessing those funds.

However, users who find themselves in a situation where they initiated a transaction involving Tornado Cash but did not complete it before the date of designation may apply for a license through OFAC to either complete the transaction or withdraw the virtual currency without violating the sanctions.

The Tornado Cash designation came just three months after the Department's first designation of a virtual currency mixer on May 6, 2022, and OFAC has warned that it will continue to "aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them." Companies and individuals dealing in the realm of cryptocurrency should pay close attention to OFAC’s recent campaign against cybercrimes.

The attorneys of Lewis Brisbois’ Consumer Financial Services Practice are actively monitoring this ongoing situation and advising clients on emerging legal issues. For more information on these developments and advice on how to effectively manage business risks, contact the authors of this alert.

Authors:

Rebecca Stoddard, Associate

Thomas A. Brooks, Partner

Editor:

Jane C. Luxton, Managing Partner