A federal court has delivered a decisive verdict supporting the U.S. Treasury Department’s authority to impose sanctions on Tornado Cash, a cryptocurrency mixer, effectively dismissing a lawsuit initiated by six users.
In the previous year, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) had accused Tornado Cash of laundering over $7 billion in cryptocurrencies since its establishment in 2019. The Department’s allegations went further, implicating Tornado Cash as a pivotal tool exploited by malicious entities, including North Korea’s Lazarus Group, for laundering stolen crypto assets pilfered from exchanges and virtual games like Axie Infinity.
The ruling emanated from U.S. District Judge Robert Pitman, who simultaneously rejected the summary judgment plea lodged by six plaintiffs, among them two employees of the cryptocurrency exchange behemoth, Coinbase. On August 17, Judge Pitman affirmed the validity of OFAC’s determinations regarding Tornado Cash and asserted the agency’s entitlement to designate Tornado Cash under sanction laws.
Judge Pitman stated, “The record sufficiently supports OFAC’s determination that the founders, the developers, and the Tornado Cash DAO have acted jointly to promote and govern Tornado Cash and to profit from these activities.” He disagreed with the plaintiffs’ assertion that the government’s actions impinged on their First Amendment rights.
Paul Grewal, the Chief Legal Officer of Coinbase, a supporter of the lawsuit, remarked that Coinbase continues to believe that “Plaintiffs’ challenge to OFAC’s Tornado Cash action is valid.” In response, a Treasury spokesperson expressed satisfaction with the Texas District Court’s opinion, highlighting the Department’s commitment to safeguarding U.S. clients.
The Treasury spokesperson emphasized the importance of disrupting North Korea’s increasing reliance on virtual currency theft and cybercrime activities. This is seen as a crucial measure to impede the regime’s ability to fund its ballistic missile and weapons of mass destruction programs.
This move to impose sanctions arrives at a time when 2022 witnessed a surge in funds flowing into crypto mixers from addresses linked to illicit activities. A Chainalysis report from the previous year revealed that illicit addresses contributed to 23% of funds sent to mixers in 2022, marking a significant rise from the 12% recorded in 2021.
This surge in illicit crypto transactions prompted government agencies to take swift action against non-compliant mixers or impose stricter sanctions. The UK’s National Crime Agency (NCA) notably called for mixers to implement know-your-customer (KYC) checks and maintain comprehensive audit trails for tokens traversing their networks. Such regulations aimed to bring crypto mixers in line with anti-money laundering laws, customer verification requirements, and enhanced transaction monitoring.