Shalini Nagarajan

Coin Center is contesting the latest indictments against Tornado Cash.



Peter Van Valkenburgh, research director at the non-profit blockchain advocacy group, stated that the indictment&#8217;s limited facts don&#8217;t clearly indicate any legal violations of the relevant law.



The US Justice Department charged the co-founders of Tornado Cash with money laundering and sanctions violations on Wednesday. 



Additionally, co-founder Roman Semenov was placed on the Office of Foreign Assets Control&#8217;s (OFAC) list of specially designated nationals. Roman Storm, Semenov&#8217;s business associate, was also implicated. Both are accused of laundering over $1 billion in illicit funds via their crypto mixing service.



Valkenburgh argued in a Wednesday <a href="https://www.coincenter.org/new-tornado-cash-indictments-seem-to-run-counter-to-fincen-guidance/">blog</a> that the allegations in the indictment seem to contradict guidelines set by the US Financial Crimes Enforcement Network (FinCEN).



Read more: <a href="https://blockworks.co/news/roman-semenov-tornado-cash-ofac-list">DOJ arrests Tornado Cash co-founder Roman Storm, OFAC sanctions Roman Semenov</a>



He stated that Tornado Cash merely supplies the software for money transmission, rather than transmitting money itself.



He further pointed out that the indictment lacks factual evidence to demonstrate that the accused were involved in activities that would legally be considered money transmission.



Valkenburgh cited FinCEN&#8217;s interpretation of the relevant rule under the US Bank Secrecy Act, which states that a provider of anonymizing software is not considered a &#8220;money transmitter.&#8221;



“The indictment provides various factual allegations describing the activities the defendants performed, but all of those facts point to the defendants fitting squarely within FinCEN’s guidance on anonymizing software providers rather than them being money transmitters,” the research director wrote.



He also stated that while the government accuses the defendants of promoting Tornado Cash, earning profits from a governance token and creating various features of the tool, none of these actions constitute the receipt and transfer of money.



In 2022, OFAC imposed sanctions on Tornado Cash, alleging that the platform enabled hackers to launder $7 billion in cryptocurrency. They specifically targeted 45 Ethereum wallet addresses.



In response, Coin Center <a href="https://blockworks.co/news/coin-center-sues-over-treasurys-tornado-cash-sanctions">filed a lawsuit</a> against the US Treasury, claiming that the sanctions imposed on Tornado Cash unlawfully penalize Americans seeking to safeguard their privacy when utilizing their own digital assets.



The US federal court <a href="https://blockworks.co/news/coinbase-motion-tornado-cash-ban-unconstitutional">recently upheld sanctions</a> against the crypto mixing service, dismissing a separate Coinbase-backed lawsuit. The ruling has wider implications, impacting individuals who seek to use privacy-focused protocols for lawful purposes.



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Coin Center

Coin Center raises legal questions over Tornado Cash co-founders’ indictment

Casey Wagner

<div id="highlights-block_6307baeefea3f" class="highlights">
 <ul>
 <li>Coin Center’s Peter Van Valkenburg, said OFAC’s decision to sanction Tornado Cash and 45 related Ethereum addresses exceeds its authority</li>
 <li>Code is not the same type of “property” Congress allows OFAC to sanction, Coin Center argued, and will to take the battle to court, if needed</li>
 </ul>
 
</div>



In a new report, non-profit blockchain advocacy group Coin Center argues that the recently-sanctioned Tornado Cash smart contracts are not entities the Office of Foreign Asset Control can blacklist.&nbsp;



Peter van Valkenburg, Coin Center’s director of research, claims in Coin Center’s latest <a href="https://coincenter.substack.com/p/how-does-tornado-cash-actually-work" target="_blank" rel="noreferrer noopener">report</a> that OFAC’s move to sanction Tornado Cash and 45 related Ethereum addresses exceeds its authority, as granted by Congress in the <a href="https://uscode.house.gov/view.xhtml?path=/prelim@title50/chapter35&amp;edition=prelim" target="_blank" rel="noreferrer noopener">International Emergency Economic Powers Act</a> (IEEPA). 



“IEEPA empowers OFAC to sanction ‘property in which some foreign country or national has an interest,’” Van Valkenburg wrote in the report published Thursday. “Does the Tornado Cash listing fit within these powers, or is it statutory overreach?



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“We believe it is clearly overreach,” van Valkenburg wrote.</blockquote>



Van Valkenburg and Coin Center argue that Tornado Cash is a software tool used by far more than just foreign countries and nationals. It is decentralized code, with scant few contracts OFAC singles out for sanction that actually can be updated by any human, and these are not used to control, mix or move user funds, Van Valkenburg added.&nbsp;



“None of the core contracts that provide privacy tools to users can be upgraded, changed, or altered,” Van Valkenburg said. “The privacy that users get from these contracts is guaranteed with math and software that is as immutable as the Ethereum blockchain itself.” 



The IEEPA allows OFAC to block “transactions” involving property in which a foreign country or national has interest, Van Valkenburg said, but this terminology does not apply to Tornado Cash activities.&nbsp;



“The individual choice to move one’s tokens from a personal address to a Tornado Cash address is no more a ‘transaction’ with another person than moving one’s valuables from a drawer in one’s home to a safe in one’s home,” Van Valkenburg argues. “At no point does any third party have any control or power during the movement.”&nbsp;



The question of if or how OFAC can place sanctions against a code has been <a href="https://cms.blockworks.co/decentralized-or-not-officials-say-tornado-cash-responsible-for-illicit-activity/" target="_blank" rel="noreferrer noopener">central</a> to the discussion around Tornado Cash in recent weeks.&nbsp;



The Treasury Department argues that there are people who can alter Tornado Cash’s code, and it is their responsibility to ensure that illicit activity does not occur.&nbsp;



“Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks,” Brian Nelson, under secretary of the Treasury for terrorism and financial intelligence, said on Aug. 8 when the sanctions were <a href="https://home.treasury.gov/news/press-releases/jy0916" target="_blank" rel="noreferrer noopener">announced</a>. “Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”



Since its launch in Aug. 2019, Tornado Cash has received over $7.6 billion worth of ether, “a sizable portion of which have come from illicit or high-risk sources,” a recent Chainalysis <a href="https://blog.chainalysis.com/reports/tornado-cash-ofac-designation-sanctions/">report</a> noted. Of this figure, about 18% of funds came from sanctioned entities, but, the report notes, almost all the funds were received before the entities were added to the sanctions list. 



Less than 11% of funds received by the recently-sanctioned crypto mixing service Tornado Cash were stolen from other cryptocurrency exchanges and protocols, according to Chainalysis.



Coin Center, which has been a vocal opponent of OFAC’s decision to sanction Tornado Cash since the decision was announced earlier this month, has released a series of reports detailing how the mixing service works and what falls within OFAC’s powers.



The advocacy group said on Aug. 15 that it would be exploring taking OFAC to court over the Tornado Cash matter. 



The report comes shortly after Dutch financial crimes agency FIOD <a href="https://cms.blockworks.co/netherlands-arrests-suspected-tornado-cash-dev-days-after-us-sanctions/" target="_blank" rel="noreferrer noopener">arrested</a> a 29-year-old Tornado Cash developer in Amsterdam following OFAC’s sanctions announcement.



A Dutch judge ruled Wednesday that Alexey Pertsev may be held in jail without bail for up to 90 days while awaiting a public hearing.



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