Shalini Nagarajan

Coin Center is contesting the latest indictments against Tornado Cash.



Peter Van Valkenburgh, research director at the non-profit blockchain advocacy group, stated that the indictment&#8217;s limited facts don&#8217;t clearly indicate any legal violations of the relevant law.



The US Justice Department charged the co-founders of Tornado Cash with money laundering and sanctions violations on Wednesday. 



Additionally, co-founder Roman Semenov was placed on the Office of Foreign Assets Control&#8217;s (OFAC) list of specially designated nationals. Roman Storm, Semenov&#8217;s business associate, was also implicated. Both are accused of laundering over $1 billion in illicit funds via their crypto mixing service.



Valkenburgh argued in a Wednesday <a href="https://www.coincenter.org/new-tornado-cash-indictments-seem-to-run-counter-to-fincen-guidance/">blog</a> that the allegations in the indictment seem to contradict guidelines set by the US Financial Crimes Enforcement Network (FinCEN).



Read more: <a href="https://blockworks.co/news/roman-semenov-tornado-cash-ofac-list">DOJ arrests Tornado Cash co-founder Roman Storm, OFAC sanctions Roman Semenov</a>



He stated that Tornado Cash merely supplies the software for money transmission, rather than transmitting money itself.



He further pointed out that the indictment lacks factual evidence to demonstrate that the accused were involved in activities that would legally be considered money transmission.



Valkenburgh cited FinCEN&#8217;s interpretation of the relevant rule under the US Bank Secrecy Act, which states that a provider of anonymizing software is not considered a &#8220;money transmitter.&#8221;



“The indictment provides various factual allegations describing the activities the defendants performed, but all of those facts point to the defendants fitting squarely within FinCEN’s guidance on anonymizing software providers rather than them being money transmitters,” the research director wrote.



He also stated that while the government accuses the defendants of promoting Tornado Cash, earning profits from a governance token and creating various features of the tool, none of these actions constitute the receipt and transfer of money.



In 2022, OFAC imposed sanctions on Tornado Cash, alleging that the platform enabled hackers to launder $7 billion in cryptocurrency. They specifically targeted 45 Ethereum wallet addresses.



In response, Coin Center <a href="https://blockworks.co/news/coin-center-sues-over-treasurys-tornado-cash-sanctions">filed a lawsuit</a> against the US Treasury, claiming that the sanctions imposed on Tornado Cash unlawfully penalize Americans seeking to safeguard their privacy when utilizing their own digital assets.



The US federal court <a href="https://blockworks.co/news/coinbase-motion-tornado-cash-ban-unconstitutional">recently upheld sanctions</a> against the crypto mixing service, dismissing a separate Coinbase-backed lawsuit. The ruling has wider implications, impacting individuals who seek to use privacy-focused protocols for lawful purposes.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.

Coin Center raises legal questions over Tornado Cash co-founders’ indictment

<div id="highlights-block_6347c4885d2fa" class="highlights">
 <ul>
 <li>Users that are “dusted” still face criminal liability and reporting obligations, suit alleges</li>
 <li>Outcome of lawsuit will be precedent-setting in whether the Treasury can continue sanctioning code</li>
 </ul>
 
</div>



Non-profit blockchain advocacy group Coin Center has filed a lawsuit against the US Treasury over its Tornado Cash sanctions, saying the move effectively criminalizes American citizens wanting to protect their privacy while using their own cryptoassets.



Other parties in Coin Center’s Wednesday <a href="https://www.coincenter.org/app/uploads/2022/10/1-Complaint-Coin-Center-10-12-22.pdf" target="_blank" rel="noreferrer noopener">complaint</a> are user Patrick O’Sullivan, New York-based investor David Hoffman and a Ukrainian supporter anonymously using the name “John Doe.”



Hoffman stated that after the Treasury’s sanctions, an unknown individual sent cryptoassets to his public address through Tornado Cash, consequently embroiling him in the situation.



“Ethereum users like Mr. Hoffman have no ability to reject incoming transfers. So the criminalization of Tornado Cash empowered someone else to implicate Mr. Hoffman and force reporting obligations on him by causing him to receive an asset from a sanctioned entity,” the filing said.&nbsp;



“And it has licensed anyone else who wishes to harass or inconvenience Mr. Hoffman to continue to send crypto assets through Tornado Cash to Mr. Hoffman’s publicly known addresses, each time triggering potential liability and reporting obligations.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">I&#39;m suing the Department of Tresury! I got dusted from <a href="https://twitter.com/TornadoCash?ref_src=twsrc%5Etfw">@TornadoCash</a>, and now every year of my life I am FORCED file a report reaffirming that I&#39;m not a criminal. I don&#39;t intend to waste my time like that. David Hoffman vs Janet Yellen Let&#39;s dance <a href="https://t.co/GVCMuzvpEH">pic.twitter.com/GVCMuzvpEH</a>&mdash; DavidHoffman.bedrock 🦇🔊🏴 (@TrustlessState) <a href="https://twitter.com/TrustlessState/status/1580253035804372993?ref_src=twsrc%5Etfw">October 12, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



So far, there is no known example of the Treasury pursuing such a case.



Coin Center also states that the Treasury exceeded its regulatory authority because Tornado Cash is not a “person,” rather, it is a “privacy tool beyond the control of anyone.”



Coin Center’s lawsuit comes after its director of research <a href="https://cms.blockworks.co/coin-center-condemns-tornado-cash-sanctions/" target="_blank" rel="noreferrer noopener">said</a> the OFAC’s authority is granted by Congress in the International Emergency Economic Powers Act (IEEPA). The act empowers OFAC to sanction “property in which some foreign country or national has an interest.” Tornado Cash, a software tool, doesn’t come under that remit, Coin Center argues.



Debate around how OFAC can place sanctions against a code has been a key discussion ever since. Crypto exchange Coinbase funded a <a href="https://www.reuters.com/markets/currencies/coinbase-backs-lawsuit-against-us-treasury-over-tornado-cash-sanctions-2022-09-08/" target="_blank" rel="noreferrer noopener">similar lawsuit</a> against the Treasury, claiming that its jurisdiction does not extend to software code and smart contracts. In that suit, six Tornado Cash users claimed the Treasury overstepped its authority in sanctioning the mixer.



<h3 class="wp-block-heading">Sanctions mark evidence of mounting geopolitical pressure</h3>



The US Treasury’s Office of Foreign Assets Control <a href="https://cms.blockworks.co/us-treasury-bans-citizens-from-using-mixing-service-tornado-cash/" target="_blank" rel="noreferrer noopener">added Tornado Cash</a> and 45 related Ethereum wallet addresses to its list of sanctioned entities in August, making it illegal for any US person to engage with the service in any manner.



Those sanctions led to <a href="https://cryptoslate.com/defi-protocols-aave-uniswap-balancer-ban-users-following-ofac-sanctions-on-tornado-cash/" target="_blank" rel="noreferrer noopener">crypto platforms</a> banning accounts associated with the crypto mixing service. Moreover, it created the risk of user addresses being banned and put centrally managed funds in jeopardy.



Crypto mixers provide transaction anonymity by commingling funds, thereby obfuscating the source from which they came. Such services have come under increased scrutiny after <a href="https://cms.blockworks.co/treasury-official-insists-crypto-mixers-can-obstruct-russian-sanctions/" target="_blank" rel="noreferrer noopener">concerns about sanctioned Russian entities</a> using crypto to make it hard to trace the source and flow of funds.&nbsp;



The Treasury also alleges that North Korea-sponsored hacking collective Lazarus Group stole over $620 million in cryptocurrency from the <a href="https://cms.blockworks.co/axie-infinity-developers-made-some-trade-offs-that-enabled-625m-ronin-breach/" target="_blank" rel="noreferrer noopener">Ronin Bridge protocol</a>.



Experts say long-term implications of the sanctions will take time to play out.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.

Coin Center Sues Over Treasury’s Tornado Cash Sanctions

Casey Wagner

<div id="highlights-block_6307baeefea3f" class="highlights">
 <ul>
 <li>Coin Center’s Peter Van Valkenburg, said OFAC’s decision to sanction Tornado Cash and 45 related Ethereum addresses exceeds its authority</li>
 <li>Code is not the same type of “property” Congress allows OFAC to sanction, Coin Center argued, and will to take the battle to court, if needed</li>
 </ul>
 
</div>



In a new report, non-profit blockchain advocacy group Coin Center argues that the recently-sanctioned Tornado Cash smart contracts are not entities the Office of Foreign Asset Control can blacklist.&nbsp;



Peter van Valkenburg, Coin Center’s director of research, claims in Coin Center’s latest <a href="https://coincenter.substack.com/p/how-does-tornado-cash-actually-work" target="_blank" rel="noreferrer noopener">report</a> that OFAC’s move to sanction Tornado Cash and 45 related Ethereum addresses exceeds its authority, as granted by Congress in the <a href="https://uscode.house.gov/view.xhtml?path=/prelim@title50/chapter35&amp;edition=prelim" target="_blank" rel="noreferrer noopener">International Emergency Economic Powers Act</a> (IEEPA). 



“IEEPA empowers OFAC to sanction ‘property in which some foreign country or national has an interest,’” Van Valkenburg wrote in the report published Thursday. “Does the Tornado Cash listing fit within these powers, or is it statutory overreach?



<blockquote class="wp-block-quote">“We believe it is clearly overreach,” van Valkenburg wrote.</blockquote>



Van Valkenburg and Coin Center argue that Tornado Cash is a software tool used by far more than just foreign countries and nationals. It is decentralized code, with scant few contracts OFAC singles out for sanction that actually can be updated by any human, and these are not used to control, mix or move user funds, Van Valkenburg added.&nbsp;



“None of the core contracts that provide privacy tools to users can be upgraded, changed, or altered,” Van Valkenburg said. “The privacy that users get from these contracts is guaranteed with math and software that is as immutable as the Ethereum blockchain itself.” 



The IEEPA allows OFAC to block “transactions” involving property in which a foreign country or national has interest, Van Valkenburg said, but this terminology does not apply to Tornado Cash activities.&nbsp;



“The individual choice to move one’s tokens from a personal address to a Tornado Cash address is no more a ‘transaction’ with another person than moving one’s valuables from a drawer in one’s home to a safe in one’s home,” Van Valkenburg argues. “At no point does any third party have any control or power during the movement.”&nbsp;



The question of if or how OFAC can place sanctions against a code has been <a href="https://cms.blockworks.co/decentralized-or-not-officials-say-tornado-cash-responsible-for-illicit-activity/" target="_blank" rel="noreferrer noopener">central</a> to the discussion around Tornado Cash in recent weeks.&nbsp;



The Treasury Department argues that there are people who can alter Tornado Cash’s code, and it is their responsibility to ensure that illicit activity does not occur.&nbsp;



“Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks,” Brian Nelson, under secretary of the Treasury for terrorism and financial intelligence, said on Aug. 8 when the sanctions were <a href="https://home.treasury.gov/news/press-releases/jy0916" target="_blank" rel="noreferrer noopener">announced</a>. “Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”



Since its launch in Aug. 2019, Tornado Cash has received over $7.6 billion worth of ether, “a sizable portion of which have come from illicit or high-risk sources,” a recent Chainalysis <a href="https://blog.chainalysis.com/reports/tornado-cash-ofac-designation-sanctions/">report</a> noted. Of this figure, about 18% of funds came from sanctioned entities, but, the report notes, almost all the funds were received before the entities were added to the sanctions list. 



Less than 11% of funds received by the recently-sanctioned crypto mixing service Tornado Cash were stolen from other cryptocurrency exchanges and protocols, according to Chainalysis.



Coin Center, which has been a vocal opponent of OFAC’s decision to sanction Tornado Cash since the decision was announced earlier this month, has released a series of reports detailing how the mixing service works and what falls within OFAC’s powers.



The advocacy group said on Aug. 15 that it would be exploring taking OFAC to court over the Tornado Cash matter. 



The report comes shortly after Dutch financial crimes agency FIOD <a href="https://cms.blockworks.co/netherlands-arrests-suspected-tornado-cash-dev-days-after-us-sanctions/" target="_blank" rel="noreferrer noopener">arrested</a> a 29-year-old Tornado Cash developer in Amsterdam following OFAC’s sanctions announcement.



A Dutch judge ruled Wednesday that Alexey Pertsev may be held in jail without bail for up to 90 days while awaiting a public hearing.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.

Coin Center Condemns Tornado Cash Sanctions

<div id="highlights-block_6258a3895ff50" class="highlights">
 <ul>
 <li>The rule seeks to change the definition of “exchange” to include entities that connect buyers and sellers</li>
 <li>The rule violates the First Amendment, according to Supreme Court precedent, Coin Center said</li>
 </ul>
 
</div>



A new rule proposed by the SEC to expand its definition of “exchange” will unfairly subject developers and publishers to registration requirements and violates the US Constitution, nonprofit research group Coin Center said Thursday.&nbsp;



The SEC <a href="https://www.federalregister.gov/documents/2022/03/18/2022-01975/amendments-regarding-the-definition-of-exchange-and-alternative-trading-systems-atss-that-trade-us" target="_blank" rel="noreferrer noopener">revealed</a> a proposed rule in March that would classify as exchanges entities that bring “buyers and sellers” together and &#8220;make available&#8221; communications protocols. The regulatory body has previously defined exchanges as entities that bring together “orders&#8221; and &#8220;use methods&#8221; to operate trades. 



“This rulemaking aims in part to expand the definition of &#8216;exchange&#8217; in order to encompass additional financial services organizations,” Coin Center’s <a href="https://www.coincenter.org/comments-to-the-securities-exchange-commission-on-amendments-regarding-the-definition-of-exchange-and-alternative-trading-systems/" target="_blank" rel="noreferrer noopener">comment letter</a> read.



“The way it does so, however, would create an inappropriately broad standard for registration that would impose an unconstitutional prior restraint on the protected speech activities of countless software developers and technologists.”



By expanding the definition of “exchange,” more groups and individuals would be required to register as such, Coin Center pointed out. While the SEC makes no mention of cryptocurrencies or digital asset technology in the proposal, the industry would be impacted should the rule pass, Coin Center said. 



<blockquote class="wp-block-quote">“This rule change would undoubtedly impact countless developers, publishers, and republishers who share protocols (rules in computer language) online that allow persons to trade ‘tokens’ or other valuable digital assets,” the comment letter said.&nbsp;</blockquote>



In addition to the harsher registration requirements, Coin Center argues that the proposed rule violates the First Amendment by infringing on freedom of speech.



The advocacy group cites a 1985 court case, Lowe v. SEC, where the SEC attempted to ban people from publishing newsletters with stock tips. The court ruled the ban unconstitutional.&nbsp;



“We urge the Commission to follow the counsel of former Commissioner Karmel as well as current Commissioner Peirce, and to narrow the scope of the definition and avoid chilling the speech rights of Americans,” the letter said.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Don’t miss the next big story – join our <a href="https://blockworks.co/newsletter?source=end" target="_blank" rel="noreferrer noopener">free daily newsletter</a>.