OFAC Lawsuit Details Crypto Industry’s Sanction Concerns

Sanctioning Tornado Cash has only increased mixing activity on other platforms, industry members said

article-image

Source: DALL·E

share
  • Sanctioning Tornado Cash has not diminished mixing activity, experts say
  • The suit, filed in federal court in the Western District of Texas, features six plaintiffs, including Coinbase employees and a former Amazon engineer

As legal action picks up, the crypto industry is increasingly uncertain about potential fallout from recent sanctions against mixing service Tornado Cash

In August, Tornado Cash — allegedly used to launder stolen funds linked to major hacks — was added to the Office of Foreign Asset Control’s Specially Designated Nationals (SDN) list, along with 45 associated Ethereum wallet addresses. 

Complying to the sanctions and parsing out what this means for the future of the crypto industry, especially with regards to privacy, has been a challenge, industry members said. 

Around 92% of the crypto ecosystem has exposure to Tornado Cash, Liat Shetret, director of global policy and regulation at Elliptic, reported during a Blockworks’ webinar Thursday. 

“What that’s meant on the ground for crypto businesses is that their rate of false positives skyrocketed because once the sanctions dropped on Tornado Cash, then they were really immediately obligated to not have any kind of exposure to Tornado Cash,” Shetret said. “And yet that remains a little bit gray, depending on OFAC language and how folks interpret it.”

The Treasury alleges that North Korea-sponsored hacking collective Lazarus Group, which in March stole over $620 million in cryptocurrency from the Ronin Bridge protocol, attempted to conceal the origin of the funds with Tornado Cash. Blockchain analytics firm Chainalysis agrees. 

“OFAC’s designation of Tornado Cash is a crucial moment in the fight against cryptocurrency-based crime,” a Chainalysis report said. “For one thing, it’s especially timely: More cryptocurrency is being stolen than ever, and in almost every hack we’ve observed this year, Tornado Cash has received at least some of the stolen funds.”

Regardless of the users employing Tornado Cash for legal reasons, lawmakers generally have a hard time justifying any use of the technology, according to lobbyists. 

“Unfortunately, the national security hawks in Congress way out number the privacy hawks, and by a very large portion,” Ron Hammond, director of government relations at the Blockchain Association, said during the webinar. “Capitol Hill will always be more about taking more privacy rights slowly away in the name of national security.” 

Cryptocurrency investors and users with ether locked in Tornado Cash moved forward with a lawsuit against OFAC Thursday, arguing that the regulatory authority overstepped its power by sanctioning the software. The legal effort is being funded by Coinbase, which is fighting regulatory battles of its own as uncertainty around token classification continues. 

The suit, filed in federal court in the Western District of Texas, features six plaintiffs: Coinbase employees Tyler Almeida and Nate Welch, Prysmatic Labs co-founder Preston Van Loon, GridPlus engineer Kevin Vitale, Ethereum proponent and angel investor Alex Fisher, and former Amazon engineer Joseph Van Loon. 

“To sanction a software is a very unique and interesting piece, and we’ve seen that the aftermath of this OFAC now has been delivered with a suit against them…so we’re gonna see a legal battle,” Shetret said. “I’m really quite desperate about this topic because it’s huge. It’s a massive issue and I think it’s really caused a lot of confusion.”

It’s not the first time OFAC has sanctioned a cryptocurrency mixer. In May, officials targeted Blender.io, a centralized service Lazarus Group also allegedly used to conceal stolen funds. But Tornado Cash is different, some experts say. 

“Blender.io was designated back in May of this year, but it’s different and in a pretty meaningful way, which is that was a centralized custodial service and [Tornado Cash]…is just code,” Michael Mosier, former deputy chief in the Department of Justice’s money laundering and asset recovery section, said during a Twitter Spaces discussion last month.

“Just because Tornado Cash is now sanctioned, all that activity, it may be lulled for a day or two, but the [mixing] activity has spiked back up again on a variety of other platforms,” Shetret said. “The activity has not stopped, it’s just moved.”


Get the news in your inbox. Explore Blockworks newsletters:

Tags

Decoding crypto and the markets. Daily, with Byron Gilliam.

Upcoming Events

Old Billingsgate

Mon - Wed, October 13 - 15, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Research Report Templates.jpg

Research

Figure, founded by former SoFi CEO Mike Cagney, has emerged as a leader in onchain RWAs, with ~$17.5B publicly tokenized. The platform’s ecosystem volume is growing ~40% YoY as it expands beyond HELOCs into student loans, DSCR loans, unsecured loans, bankruptcy claims, and more. Operationally, Figure cuts average loan production cost by ~93% and compresses median funding time from ~42 days to ~10, creating a durable speed-and-cost advantage.

article-image

If the president breaks the Fed, he’ll own the budget problems

article-image

Combining Franklin Templeton’s tokenization expertise with Binance’s trading infrastructure could speed crypto adoption, companies say

article-image

The firm’s upcoming filing comes as competition heats up over the USDH stablecoin

article-image

Robinhood and Coinbase are vying for user attention with new social features that could rival Twitter

article-image

Atkins backs predictable digital asset framework through Project Crypto, marking a departure from prior enforcement tactics

by Blockworks /
article-image

Following a roundtable, the startup emerges as frontrunner, despite entries from Paxos, Ethena, and others