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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
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