OFAC Removes Sanctions From Crypto Mixer, Asks Court to Moot Case
The Department of the Treasury last week dropped sanctions against cryptocurrency mixer Tornado Cash following a review of the "novel legal and policy issues raised by use of financial sanctions against financial and commercial activity occurring within evolving technology and legal environments." Treasury told a Texas court it removed Tornado Cash from the Specially Designated Nationals and Blocked Persons list, arguing that a case against the sanctions listing should now be briefed on whether the issue is moot (Van Loon, et al. v. Department of the Treasury, W.D. Tex. # 23-00312).
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The Office of Foreign Assets Control sanctioned the service in 2022 for its role in laundering over $7 billion worth of cryptocurrency, including on behalf of North Korean hacking entity Lazarus Group (see 2208080031). In response, six users of Tornado Cash challenged the designation in federal court, arguing that the service is used for benign purposes, including to anonymously donate to Ukraine's government (see 2311200017).
The district court upheld the sanctions, though the U.S. Court of Appeals for the 5th Circuit disagreed, finding in November that OFAC went beyond its statutory authority in listing Tornado Cash. The appellate court homed in on whether OFAC could sanction "immutable" smart contracts, which includes software that facilitates transfers of cryptocurrency between humans and -- unlike “mutable” smart contracts - can’t be altered or deleted after they’re created.
The 5th Circuit said the immutable contracts aren't "property" as defined under the International Emergency Economic Powers Act and North Korea Sanctions and Policy Enhancement Act, and they can't be blocked.
The 5th Circuit sent the case back to the Texas court with instructions to grant the six individuals' partial motion for summary judgment. Now returned to the district court, OFAC said its removal of Tornado Cash from the sanctions list requires a briefing on the question of mootness.
The six individuals opposed this notion, arguing that "[e]nough is enough." The brief said it's "time for this Court to do what the Fifth Circuit ordered months ago" and declare that OFAC's designation is unlawful and set it aside. The six individuals said the losing party here cannot suspend its challenged conduct prior to judgment as a way to "escape that judgment."
In addition, the six individuals said the case isn't moot, since the government has not suggested it will "not seek to sanction Tornado Cash again. Quite the opposite," the brief said. The government's reasons for delisting Tornado Cash fail to eliminate any "reasonable expectation" that OFAC won't return to its "old ways," which is the standard required for mootness, the brief said.
When it delisted Tornado Cash on March 21, OFAC stressed that it was still “deeply concerned” about North Korean money laundering and hacking, and it plans to continue sanctioning “malicious cyber actors” that “profit from their criminal activities through the exploitation of digital assets and the digital assets ecosystem.”
Treasury will “monitor closely any transactions that may benefit malicious cyber actors or [North Korea], and U.S. persons should exercise caution before engaging in transactions that present such risks," it said.