Posted November 16, 2023 at 6:49 pm EST.
Coinbase-funded attorneys have appealed separate, Federal district court rejections of a lawsuit asking the judge to reverse sanctions against decentralized mixer Tornado Cash. The crypto advocacy group, Coin Center, has said it is also planning an appeal.
The Coinbase-backed appeal maintains that a district court “ignored the facts,” mistakenly linking Tornado Cash developers to smart contracts that have allegedly been used to hide assets looted in a March 2022 hack of Axie Infinity’s Ronin platform. Lawyers are reiterating their argument that Tornado Cash is decentralized, and therefore should not be held responsible for its use in laundering stolen assets. Coin Center’s appeal follows a different logic, focusing on different, individual wallet addresses.
Successful appeals could set a precedent in reining in the authority of the Office of Foreign Asset Control (OFAC), which enforces trade sanctions, but the odds appear long. The initial sanctions occurred amid growing scrutiny of mixers, which jumble digital assets and have been used by cybercriminals and rogue states to hide the source of their funds, including North Korean hacking group, Lazarus Group, which the Treasury Department said was involved in the Ronin hack.
District courts in Florida and Texas earlier this year sided heavily with the OFAC in continuing the sanctions, at one point saying that even if Tornado Cash was decentralized, that the sanctions were permissible, similar to legal actions against a terrorist group such as al-Quaida.
But the Coinbase-backed brief likened the action to 2014 sanctions against Russian gun manufacturer Kalashnikv in the aftermath of Russia’s annexation of Crimea. Those sanctions don’t prohibit anyone from owning a Kalashnikov that was purchased from the company prior to the sanctions.
Sanctions’ History
OFAC imposed initial sanctions on Tornado Cash in August 2022. The sanctions came more than five months after the U.S. Treasury Department began designating ether wallet addresses through which the hacked Ronin funds flowed. The funds were linked to Lazarus Group.
The agency sanctioned Blender.io, its first designation of a crypto mixer, for allegedly laundering $20 million of that total. That designations was uncontroversial, as Blender.io was a fully centralized service.
The August designation of Tornado Cash differed because the service operates on smart contracts, providing mixing services on a basis that the digital asset industry argues separates it from the legal accountability of custodial crypto services. The principle is core to decentralization.
Congressman Tom Emmer, R-Minn., a noted crypto fan, wrote a letter to Treasury using several critiques that would appear in Coinbase’s lawsuit.
“How are the following SDN-listed Ethereum addresses either aliases of a person (individual or entity) or the property of a person?” Emmer wrote.
Van Loon v. Treasury, the Coinbase-backed case, opened on Sept. 8, 2022 with a similar complaint: “Tornado Cash is not a person, entity, or organization. It is a decentralized, open source software project that restores some privacy for Ethereum users.”
Coin Center would follow with a suit at the end of October 2022. A few weeks later, FTX would collapse, the latest body blow to a scandal-plagued industry that soured much of Washington on crypto. Regulators and courts seemed to look more dubiously at digital assets.
Weighing the cases
The district court in Texas dismissed the Coinbase-backed lawsuit in August, less than a year after its filing. That’s fast by Federal court standards.
Coin Center’s case did not dispute Tornado Cash’s status as an entity, but tried to isolate 20 of the sanctioned addresses as being smart contracts outside of a “property interest.”
That case was under consideration for just over a year, but the reception was similarly negative. Judge T. Kent Wetherell cut short the briefing process in the case on August 23 of this year.
“There comes a point in every case where briefing needs to end,” reads Judge Wetherell’s order said. “That point has come in this case because there is nothing extraordinary about Plaintiffs’ response.”
Both plaintiffs chose venues – within circuits – with histories of challenging Federal agencies.
The Coinbase-backed legal team and a Coin Center representative declined to comment on the record.
From the outset, Coinbase has seemed prepared for a rejection at the district level and been, primed for appeals up the ladder of the U.S. judiciary. The lead attorney on the case, Kannon Shanmugam, specializes in arguments before the Supreme Court.
But appeals are ultimately a losing game. Per numbers from the U.S. Courts Administrative Office, just 5.5% and 7.2% of appeals result in reversals in those respective districts.
National security rules
Meanwhile, a separate law enforcement action bodes poorly for the plaintiffs, underscoring a current environment that is most concerned about national security and suspicious of Tornado Cash and its leadership.
The same day, the Treasury unveiled sanctions against Roman Semenov, one of Tornado Cash’s founding programmers, in a joint action with the Department of Justice, which arrested Roman Storm in Washington State.
A third co-founder, Alexei Pertsev, has been in custody in the Netherlands since almost immediately after the initial designations. All three are Russian nationals. One report from Kharon Group tied Pertsev to a separate firm sanctioned in 2018 for working with Russia’s state intelligence bureau, the FSB.
Meanwhile, a separate law enforcement action bodes poorly for the plaintiffs, underscoring a current environment that is most concerned about national security and suspicious of Tornado Cash and its leadership.
Few courts are willing to curtail OFAC’s authorities when facing a national security threat.
“We are pleased that the Florida District Court has joined the Texas District Court in upholding Treasury’s work combatting the exploitation of virtual assets by illicit actors, cyber criminals, and terrorist groups,” OFAC wrote in a statement to Unchained. “Our sanctions tools are critical to the fight against terrorist financing and weapons proliferation, whether through the traditional financial system or the virtual currency ecosystem.”
