Lawsuit Alleges Treasury Falsely Labeled Tornado Cash a Security Risk

Six cryptocurrency users filed a lawsuit against the U.S. Department of the Treasury. The lawsuit alleges that a subdivision of the Treasury, Office of Foreign Asset Control (OFAC), improperly labeled Tornado Cash a security risk. The filing names the Treasury Department, Treasury Secretary Janet Yellen, the OFAC and OFAC Director Andrea M. Gacki in its complaint.

Tornado Cash is an Ethereum-based cryptocurrency “tumbler” that anonymizes cryptocurrency transactions by shuffling the senders’ cryptocurrency with every other transaction that is currently being relayed through the protocol.

In May 2022, OFAC sanctioned Tornado Cash, alleging that it was being used to launder billions of dollars’ worth of stolen cryptocurrency. This includes hundreds of millions of dollars stolen by the notorious North Korea-based hacking ring known as the Lazarus Group. OFAC alleges that Tornado Cash poses a threat to the national security and foreign policy interests of the United States, as well as its financial security.

Soon after OFAC’s sanction, a developer behind Tornado Cash named Alexey Pertsev was arrested by Dutch authorities. They allege that he was involved in concealing illegal financial floes and facilitating money laundering.

OFAC also targeted cryptocurrency addresses that interacted with Tornado Cash, including sending funds to or receiving funds from the mixer. The sanctions could also impact addresses that contain cryptocurrencies that once passed through the Tornado Cash protocol. If an address interacts with Tornado Cash, its assets can be frozen if it is based in the United States.

The complainants in this lawsuit allege that OFAC removed Tornado Cash from its sanctions list a day before a deadline to respond to the lawsuit but re-added a variation of the sanctions under a different legal authority. They say the listed defendants did not give any justification for the withdrawal of the original sanction and the issuance of the new one.

OFAC’s sanctioning of Tornado Cash was widely unpopular in the cryptocurrency community. One Ethereum user used Tornado Cash to send transactions of 0.1 ETH to Ethereum addresses belonging to high-profile people, including Ethereum co-founder Vitalik Buterin. Coin Center also filed a lawsuit challenging OFAC’s sanction of Tornado Cash.

In their amended complaint, the complainants said, “None of the plaintiffs is a terrorist or a criminal. None launders money. None is a member of the government of North Korea or the North Korean Workers’ Party. … Plaintiffs and other law-abiding citizens are prohibited from depositing, withdrawing, sending, or receiving funds through Tornado Cash, even when the funds have no connection to illicit activity.”

The Tornado Cash protocol is still active even though peripheral assets like Tornado Cash’s website have been taken down. The plaintiffs say this puts users at risks of an enforcement action even though they use it for perfectly legal reasons.

They say the sanctions are overly broad and violate their rights to free speech and due process. They say it “threatens the ability of law-abiding Americans to engage freely and privately in financial transactions” and hurts their ability to anonymously “make donations to support important, and potentially controversial, political and social causes.”

One plaintiff used Tornado Cash to raise funds in support of Ukraine’s defense against the Russian invasion. Vitalik Buterin admitted to using Tornado Cash to donate to this cause.

The Treasury Department has not commented on the lawsuit. The case, Joseph Van Loon et al. v. Department of the Treasury, was filed in the U.S. District Court for the Western District of Texas. It was assigned the case number of 6:22-cv-00920.