A US court has overturned the sanctions against the Tornado Cash cryptocurrency mixing protocol in a decision that could signal a shift significant toward more innovation-friendly regulations for privacy-preserving technologies.
The US Treasury’s Office of Foreign Assets Control (OFAC) originally sanctioned Tornado Cash in August 2022, accusing it of facilitating money laundering by the North Korean Lazarus Group. The group was alleged to have laundered more than $455 million in stolen digital assets through the protocol.
The sanctions led to the arrest of Tornado Cash developer Alexey Pertsev, who was found guilty of money laundering by Dutch judges at the s-Hertogenbosch Court of Appeal on May 14, 2024. Pertsev was sentenced to five years and four months in prison for laundering $1.2 billion in illicit assets through the platform.
In a significant legal development, the US District Court for the Western District of Texas has reversed the OFAC sanctions, according to a Jan. 21 court filing. The court ruled:
“It is ordered and adjudged that the judgment of the district court is reversed, and the cause is remanded to the district court for further proceedings in accordance with the opinion of this court.”
Tornado Cash court filing. Source: courtlistener.com
Despite the victory for Tornado Cash, Pertsev remains in custody on money laundering-related charges.
During his trial in March 2024, Pertsev argued that he could not be held liable for the actions of users who used the Tornado Cash protocol for illegal activities.
The court rejected this defense, stating that Pertsev and the other co-founders of Tornado Cash could have implemented additional measures to prevent misuse of the protocol.
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OFAC “overstepped” its congressional authority: Tornado Cash plaintiffs
The court ruling comes after six Tornado Cash users filed an appeal against OFAC’s sanctions.
The appeal, issued on Nov. 26, 2024, argued that OFAC overstepped its “statutory authority” by blacklisting Tornado Cash in 2022. The filing stated:
“We hold that Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the “property” of a foreign national or entity, meaning (1) they cannot be blocked under IEEPA, and (2) OFAC overstepped its congressionally defined authority.”
The six plaintiffs also argued that blockchain transactions can be traceable, which is why some crypto users “want additional options to keep their transactions private.”
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The Tornado Cash sanctions raised significant concerns for developers of privacy-preserving technologies.
Offering privacy-preserving features in a legally compliant manner will be essential for future privacy protocols, Matthew Niemerg, co-founder and president of AlephZero, told Cointelegraph.
Matthew Niemerg speaking to Cointelegraph. Source: Cointelegraph
In the interim, industry insiders are hoping to see more developments in Pertsev’s own legal case, after the OFAC sanctions have been reversed.
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