- Tornado Cash, a crypto mixer, faced a legal setback when the U.S. Department of Treasury sanctioned it for alleged involvement in money laundering activities.
- Central to the legal battle was the designation of Tornado Cash’s decentralized autonomous organization (DAO) as an “entity,” a stance supported by Judge Pitman.
- Leading cryptocurrency exchange, Coinbase, has publicly supported Tornado Cash, indicating plans to appeal the court’s decision.
Tornado Cash, a crypto mixer service popular for anonymizing transactions, has experienced a legal setback against the U.S. Department of Treasury. Tornado Cash recently went head-to-head with the U.S. Department of Treasury after the Treasury’s Office of Foreign Asset Control (OFAC) placed it on a U.S. sanction list. The allegations are that Tornado Cash was complicit in laundering over $7 billion since its 2019 inception, including assisting North Korea’s Lazarus Group to launder crypto cash through decentralized exchanges and online games.
Backed by six individuals, among them two Coinbase employees, the Tornado Cash defense team moved to challenge the U.S. Department of Treasury’s decision in court. They argued the overreach of the U.S. Department of Treasury in sanctioning the company and claimed that Tornado Cash was not an entity and therefore shouldn’t be sanctioned as one. However, their motion seeking an oral argument was denied by Judge Robert Pitman, further negating their request for a partial summary judgment and instead siding with the OFAC.
The “Entity” Controversy for Tornado Cash and its DAO
A pivotal element in this court battle was the characterization of Tornado Cash. The plaintiffs asserted that Tornado Cash is not an entity, potentially to distance the service from legal and regulatory consequences. However, Judge Pitman found this line of reasoning unconvincing.
In a move that underscores the legal intricacies surrounding crypto, Judge Pitman recognized the crypto mixer’s decentralized autonomous organization (DAO) as an integral part of the Tornado Cash entity. His court order explicitly stated that the DAO, a governing system led by its voting members, resembles a corporate structure where stockholders might choose not to vote in a meeting but their abstention doesn’t change the corporate entity’s nature.
The designation of the DAO as an entity unto itself could have long-standing implications for other decentralized projects. This sets a precedent that even in decentralized systems, where governance is distributed among a network of participants, they can still be seen as entities in the eyes of the law.
Coinbase Stands In Solidarity with Tornado Cash
Coinbase has publicly thrown its weight behind Tornado Cash. After the court’s decision, Coinbase’s chief legal officer, Paul Grewal, announced on what was formerly known as Twitter that Coinbase would back the plaintiffs in appealing the decision to the Fifth Circuit.
This show of support is unsurprising given the shared stakes and intertwined interests in the outcome of such a legal challenge. It is also consistent with Coinbase’s history of contesting regulatory decisions that the company views as overreaching. Currently, Coinbase is also in a legal tussle with the U.S. Securities and Exchange Commission, another instance where they challenge the extent of regulatory jurisdiction.
