Privacy Mixer Tornado Cash Is an Entity, Judge Says

A federal judge ruled against a group of Coinbase-backed investors and developers last week who alleged the U.S. Treasury Department overstepped its authority in sanctioning Tornado Cash. In doing so, he found that Tornado Cash had a DAO that could be sanctioned.

You’re reading State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. Click here to sign up for future editions.

The narrative

Tornado Cash wasn’t really a good case for the crypto industry. It was definitely used by North Korea to launder stolen crypto, and now a federal judge has ruled that it was designated properly by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC).

Why it matters

This is the second case where the existence of a decentralized autonomous organization (DAO) was used to find that a federal regulator was within its limits to bring an enforcement action against a crypto entity.

Breaking it down

The Treasury was well within its bounds to sanction Tornado Cash, barring all U.S. persons (U.S. citizens worldwide and residents in the U.S. itself) from transacting with or otherwise using the service, a federal judge ruled last week.

Judge Robert Pitman, of the Western District of Texas, said in a relatively brief written order that plaintiffs – including Prysmatic Labs co-founder Preston Van Loon, Ethereum supporter Alex Fisher, Coinbase employees Tyler Almeida and Nate Welch and a few others – had not successfully argued that their First Amendment rights or the Administrative Procedures Act had been violated.

Tornado Cash was sanctioned just over a year ago by OFAC, which alleged the mixer – which obscures the transaction history of crypto tokens by mixing all users’ money together – was an important tool for North Korea’s Lazarus Group.

Lazarus is perhaps most famously accused of using social engineering to steal more than $600 million in crypto from Axie Infinity’s Ronin Bridge.

In his order, Judge Pitman discussed the differing views on the role of the DAO governing Tornado Cash, the characterization of the smart contracts making up the mixer, the role of a relayer in the process and even the difference of opinion on whether Tornado Cash is the software itself or the DAO running it.

“It is undisputed that Tornado Cash uses smart…