September 13, 2022

Six plaintiffs challenge OFAC’s designation of Tornado Cash

On September 8, 2022, six plaintiffs filed a complaint in the US District Court for the Western District of Texas challenging the decision by the Department of the Treasury’s Office of Foreign Assets Control to add Tornado Cash, a decentralized virtual currency mixer, to the Specially Designated Nationals and Blocked Persons (SDN) List.  The plaintiffs – all individuals who have used Tornado Cash for legitimate purposes and whose crypto assets remain locked in Tornado Cash smart contracts since the August 2022 designation – accuse the US Treasury of engaging in an “unprecedented, overbroad action” which exceeds its statutory authority, infringes upon their constitutional rights, and “threatens the ability of law-abiding Americans to engage freely and privately in financial transactions.”  The named defendants in the complaint are the Department of the Treasury, the Office of Foreign Assets Control, Secretary of the Treasury Janet Yellen and the Director of OFAC Andrea M. Gacki.

On August 8, 2022, OFAC designated Tornado Cash for allegedly laundering more than $7 billion worth of virtual currency since its creation in 2019.  According to OFAC, Tornado Cash indiscriminately facilitated anonymous virtual currency transactions while making no attempt to determine fund origins and, as a result, laundered the proceeds of cybercrimes, including $455 million in virtual currency stolen by designated-entity Lazarus Group as part of the largest known virtual currency heist at the time.  Tornado Cash was designated by OFAC pursuant to Executive Order 13694, which delegates to the Secretary of Treasury “ all powers granted to the President by the IEEPA as may be necessary to carry out the purposes” of the order.  EO 13694, in particular, enables the Secretary to identify anyone involved in malicious cyber-enabled activities, and the Secretary of Treasury has delegated its authority to the Director of OFAC who maintains the SDN List.  The IEEPA, or the International Emergency Economic Powers Act, specifically authorizes the designation of “property,” a “foreign country or a national thereof,” or a “person” of any kind, for the purpose of imposing sanctions.

The plaintiffs allege in their complaint that the US Treasury lacks the statutory authority to impose sanctions against Tornado Cash because it is not a person, entity, or organization subject to the jurisdiction of the United States but is a decentralized, open-source software project comprised of software code that has been published as a collection of smart contracts on the Ethereum blockchain.  In the complaint, plaintiffs describe smart contracts as programs that run only when predetermined conditions are met.  The plaintiffs allege that the Tornado Cash privacy protocol has consisted of “perpetually self-executing code” since 2020 and that the code cannot be altered, edited, or otherwise controlled. In addition, plaintiffs contend that the open source code can be used or distributed by anyone, and the smart contracts that are currently in use on Tornado Cash are immutable. For these reasons, plaintiffs claim that the software code “is not property, a foreign country or national thereof, or a person of any kind.”  

The plaintiffs also acknowledge in the complaint that Tornado Cash’s designation has often been compared to OFAC’s May 6, 2022 designation of Blender.io, another virtual currency mixer which OFAC sanctioned in connection with the laundering of virtual funds linked to the infamous Lazarus Group heist as well as the laundering of virtual currency by Russia-linked ransomware groups. However, plaintiffs have attempted to distinguish Tornado Cash from Blender.io alleging that, unlike Tornado Cash, Blender.io users do not retain ownership of their crypto assets at all times.  Plaintiffs also argue that Blender.io is operated under centralized control while Tornado Cash is decentralized and not owned by anyone.

The plaintiffs are seeking declaratory and injunctive relief under the Administrative Procedure Act and the US Constitution claiming that Tornado Cash’s designation by OFAC was unconstitutional under the Free Speech Clause of the First Amendment and the Due Process Clause of the Fifth Amendment.  Plaintiffs are asking the court set aside the designation, hold that it is unlawful, and permanently enjoin OFAC from enforcing it.

Complaint