On August 17, 2023, the United States District Court for the Western District of Texas ruled in favor of the U.S. Treasury, upholding the sanctions imposed by the Department of the Treasury’s Office of Foreign Assets Control against Tornado Cash.
Backed by Coinbase, the lawsuit contested the legitimacy of the sanctions that the Treasury had appended to its Specially Designated Nationals and Blocked Persons list in August 2022.
Court Dismisses Plaintiff’s Arguments
The court dismissed all arguments presented by the plaintiffs, backed by Coinbase, in a comprehensive 25-page document. The court’s decision solidifies the Treasury’s stance and brings implications for the use of privacy tools in the cryptocurrency space.
Tornado Cash is a blockchain tool designed to prioritize user privacy during blockchain transactions. It addresses a significant concern in popular cryptocurrencies like Ethereum and Bitcoin, where transaction history is publicly accessible, unlike traditional financial systems.
The court’s verdict now raises uncertainties about the extent to which Ethereum users in the U.S. can utilize privacy-oriented tools such as Tornado Cash for their cryptocurrency transactions.
Treasury’s Allegations and Money Laundering Claims
The U.S. Treasury attributes the misuse of Tornado Cash to facilitating money laundering activities, allegedly amounting to over $7 billion since the platform’s inception in 2019.
Although money laundering represents only one potential use of mixers and privacy tools, the court has linked approximately $500 million of the allegedly laundered funds to the Lazarus Group, a notorious collective of hackers affiliated with the Democratic People’s Republic of Korea.
The decision to impose sanctions on Tornado Cash has sparked controversy and disagreement, especially considering the tool’s popularity among regular cryptocurrency users.
Prominent U.S. cryptocurrency advocacy organization, Coin Center, notably initiated a lawsuit among the various legal challenges against these sanctions. The resolution of these disputes is currently pending in the District Court.
Developer’s Arrest and Impact on Tornado Cash
After the imposition of sanctions on Tornado Cash, authorities in the Netherlands apprehended Alexey Pertsev, one of its core developers. Pertsev remained in detention for eight months before his conditional release in April 2023. Pertsev’s arrest underscores the legal complexities surrounding privacy-focused tools in the cryptocurrency landscape.
Earlier in May 2022, the U.S. Treasury introduced its first-ever sanctions against a virtual currency mixer known as Blender.io. This mixer was alleged to have processed more than $20 million of proceeds from the Lazarus Group’s Axie Infinity hack. This prior case further highlights the U.S. government’s commitment to regulating virtual currency mixers.
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