Legal Scrutiny of Tornado Cash Sanctions
Talks before the Fifth Circuit have brought new scrutiny to the U.S. Treasury Department’s classification of Tornado Cash as a sanctionable entity. The legal debate centres on the sanctions imposed on the privacy-focused cryptocurrency tool.
The Treasury Department's sanctions against Tornado Cash were primarily based on the claim that North Korean hackers used the platform to launder hundreds of millions of dollars worth of cryptocurrency. However, in oral arguments, it was revealed that the Treasury cited only three instances of illicit use out of the millions of transactions processed by Tornado Cash.
During the hearing, U.S. Circuit Judge Kurt Engelhardt expressed scepticism about the Treasury's reasoning. "You're a solution in search of an entity, in a way," Engelhardt remarked, questioning the necessity of the sanctions given the limited examples of illicit activity.
Challenges to Classification and Enforcement
The Treasury has argued that Tornado Cash should be treated like a corporation due to the presence of the TORN token, which resembles corporate stock. Bradley Hinshelwood of the U.S. Department of Justice emphasized that sanctioning entities associated with North Korea helps curb their ability to support the rogue state.
However, Judge Edith Jones noted that the sanctions might not effectively prevent North Korea from using Tornado Cash, questioning the efficacy of the Treasury's approach. She pointed out that North Korea could still utilize the protocol regardless of the sanctions.
Defence and Legal Arguments
Plaintiffs argue that Tornado Cash is an open-source privacy tool, not a sanctionable entity. Kannon K. Shanmugam, representing the plaintiffs, emphasized that any profit made from Tornado Cash was through services other than the protocol itself. Shanmugam argued that Tornado Cash’s existence on the internet means it is not controlled in any meaningful way through its website.
In parallel with this appeal, the U.S. government is pursuing criminal charges against Tornado Cash co-founders Roman Semenov and Roman Storm. Storm is actively fighting the charges, while Semenov remains at large. Alexey Pertsev, another co-founder, has been sentenced to 64 months in prison in the Netherlands and is currently appealing the decision.
Additionally, the U.S. government has taken action against the founders of the Bitcoin privacy tool Samourai Wallet. The next hearing in the Samourai developers' case is scheduled for September 17th, further indicating the government's ongoing efforts to regulate privacy-focused cryptocurrency tools.
The legal battles surrounding Tornado Cash and similar privacy tools reflect broader tensions in the regulatory landscape of cryptocurrency and financial privacy. As the appeals and prosecutions continue, the outcomes will likely have significant implications for the future of digital privacy and financial regulation.
