The redesignation of coin mixer Tornado Cash by the US Treasury Department has, far from clarifying the basis for an action currently the subject of legal challenge, thrown up further questions and muddied the waters of regulation.

On November 8, the Office of Foreign Assets Control (OFAC) cited the role of Tornado Cash in “in enabling malicious cyber activities, which ultimately support the DPRK’s [Democratic People’s Republic of Korea] WMD [weapons of mass destruction] program.” That designation wholly replaced the one issued on August 8, and which sparked a legal challenge coordinated by crypto think tank Coin Center.

No authority

The challenge is based on the argument that “OFAC does not have the authority to sanction a smart contract and Americans have a right to use privacy tools”. Specifically, it argues that “Treasury’s own regulations and past executive orders limit the applicability of sanction controls to transactions with persons, entities, or their property. The Tornado Cash sanction was made without statutory and also without regulatory authority. It was made contrary to law.”

OFAC’s latest announcement appears to be an attempt to respond to this aspect of the challenge by clarifying who the ‘Tornado cash person’ is. It states it has “not designated Tornado Cash’s individual founders, developers, members of the DAO, or users, or other persons involved in supporting Tornado Cash at this time”.

Crypto lawyer Gabriel Shapiro, General Counsel at Delphi Labs, tweeted that this was “a tacit surrender to Coin Center’s lawsuit” and also “a more legally credible pivot”. But he added that it raised yet more questions, including;

• “how can we determine what property this alleged entity owns/has interests in when it’s some kind of novel joint venture with no contracts?”
• “who exactly is included in ‘Tornado Cash DAO’ in any given moment?”

“Nothing they’ve announced changes our strategy in this lawsuit.”

Peter Van Valkenburgh, Director of Research, Coin Center

Peter Van Valkenburgh, Coin Center’s Director of Research, tweeted that the new FAQ on the definition of entity issued by OFAC “creates more Qs than As” and when on to say that “These developments underscore the arbitrary and capricious nature of Treasury’s actions and their continued misunderstanding of the technology.” He said: “Nothing they’ve announced changes our strategy in this lawsuit.”

As things stand, and in OFAC’s words, “US persons cannot transact with Tornado cash or deal in its property and interests in property, absent authorization from OFAC”.

Regulatory headache

The dispute over Tornado Cash poses a regulatory headache not just because of the new tech involved, but because the underlying principles of objectors to OFAC’s actions are rooted in the constitutional rights of US citizens.

The function of coin mixers such as Tornado Cash is to obfuscate and anonymise financial transactions. OFAC sees this as providing a platform for money laundering and other illicit activity, citing the role of North Korean-sponsored hackers Lazurus Group in processing millions of dollars-worth of funds through the mixer.

But coin mixers also provide anonymity for people engaged in activities such as journalism, civil disobedience, protest or – to take a very current example – channeling funds to the Ukraine resistance movement. Users may also want anonymity for simpler reasons such as not wanting a service they have paid through a crypto transaction to have access to every transaction they have ever made.

Fourth amendment

The Fourth Amendment asserts: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and persons or things to be seized”. Those supporting the challenge to OFAC maintain the Treasury has made it a felony for US citizens to exercise their constitutional rights.

OFAC’s latest announcement is clearly a recognition that definitions need to be tightened up, but it has done little, if anything, to calm the controversy or to create the clarity that effective regulation requires.