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Court ruling protects users of Tornado Cash in key privacy case

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The U.S. Court of Appeals ruled Tornado Cash doesn't violate sanctions law, countering OFAC's 2022 claims of aiding money laundering.

A recent decision by the U.S. Court of Appeals provides a victory for users of Tornado Cash, a privacy-focused cryptocurrency tool. The court ruled on the Tornado Cash case (Van Loon v. Treasury), determining that the decentralized software used to protect digital privacy does not fall under U.S. sanctions law.

It began in August 2022, when the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, accusing the platform of facilitating illicit activities like money laundering by concealing the origins of cryptocurrency transactions. 

Tornado Cash, which operates through automated code known as “immutable smart contracts,” is designed to enhance privacy for users by obscuring the details of digital currency transactions.

In response to the sanctions, a group of Tornado Cash users, including developers and cryptocurrency advocates, argued that OFAC had overstepped its authority. 

They claimed that Tornado Cash is simply a tool and that many users employed it for lawful purposes, such as protecting personal financial information. They emphasized that the software itself should not be penalized simply because some people may misuse it.

The plaintiffs also pointed out that not all Tornado Cash users were engaged in illegal activities and that the tool had legitimate applications, especially in an era when digital transactions are increasingly transparent. 

The case centered around the question of whether immutable smart contracts could be treated as “property” owned by foreign nationals or entities, which would justify sanctions against them.

The Fifth Circuit agreed with the plaintiffs, ruling that OFAC had exceeded its authority. The court clarified that privacy-enhancing software like Tornado Cash’s smart contracts cannot be considered the property of any individual or group, whether foreign or domestic. This distinction is crucial because U.S. sanctions laws target people and organizations, not automated computer code.

In its ruling, the court also acknowledged that privacy tools like Tornado Cash can serve legitimate purposes. It highlighted that protecting one’s financial privacy is not inherently criminal, and such tools can be used for a variety of reasons, from safeguarding personal finances to securing business transactions.

This decision represents a significant turning point for cryptocurrency enthusiasts, underscoring the necessity of privacy while limiting governmental influence over digital platforms.

In late August, the U.S. Department of Justice indicted Tornado Cash co-founders Roman Storm and Roman Semenov. The charges included conspiracy to conduct money laundering, conspiracy to breach sanctions, and conspiracy to run an unlicensed money-transmitting operation. These accusations stem from claims that they facilitated laundering transactions exceeding $1 billion for the Lazarus Group, a North Korean cybercrime entity under sanctions.

In May, a Dutch judge convicted Alexy Pertsev, a Tornado Cash developer, of money laundering. Prosecutors are pushing for him to serve up to 64 months behind bars. He stands accused of facilitating the laundering of $1.2 billion in cryptocurrency using the mixer.

As the courtroom drama unfolds, U.S. legislators stepped in mid-November, urging the Treasury for updates on its measures against the issue. They pointed out a renewed focus on mixers, highlighting that Tornado Cash handled $1.8 billion in deposits in the first half of 2024—a 45% surge from last year—indicating, “this problem shows zero signs of going away anytime soon.”

Lawmakers emphasized Tornado Cash’s role in aiding rogue nations, terrorist groups, and cybercriminals, demanding detailed actions from the Treasury.

 

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