Coinbase-Backed Group Loses Lawsuit Arguing Tornado Cash Sanctions Overstepped U.S. Treasury's Authority

A group of crypto investors and developers lost a lawsuit funded by Coinbase that sought to argue the U.S. Treasury Department overstepped its authority in sanctioning Tornado Cash, a mixing service designed to make crypto transactions anonymous.

Tornado Cash is an actual entity in itself, which has a property interest in its smart contracts, wrote Judge Robert Pitman, from the U.S. District Court for the Western District of Texas, on Thursday.

The judge found an argument that Tornado Cash is not an actual entity unconvincing, writing that the Treasury Department did make sure to designate an entity, which includes the decentralized autonomous organization, or DAO, that governs the mixer.

"The DAO is an entity unto itself that, through its voting members, has demonstrated an agreement to a common purpose. As the government notes, the structure is not unlike that of stockholders of a corporation who may not intend to vote in a shareholder meeting, without this affecting the structure of the entity," he wrote.

He rejected other arguments from the plaintiffs, including one which said Tornado Cash doesn't have a property right in the actual smart contracts being designated and an argument that the sanctions violated the First Amendment.

The Treasury Department's Office of Foreign Asset Control (OFAC) sanctioned Tornado Cash last year, alleging it was a key tool used by malicious actors like North Korea's Lazarus Group to launder crypto funds stolen from decentralized exchanges and games like Axie Infinity.

The move drew an immediate rebuke from the crypto industry, with Coin Center filing its own lawsuit roughly a month after the Coinbase-backed suit.

Coinbase Chief Legal Officer Paul Grewal said on X, formerly known as Twitter, that the company would support an appeal.

In a statement shared Friday, a Treasury spokesperson said the department was pleased with the ruling.

"We are pleased with the Texas District Court’s opinion upholding Treasury’s vital work protecting U.S. national security. At a time when North Korea is increasing its reliance on virtual currency heists and other cybercrime, it’s critical to continue disrupting the regime’s ability to generate revenue for its ballistic missiles and weapons of mass destruction programs," she said.

UPDATE (Aug. 18, 2023, 18:40 UTC): Adds Treasury statement.