Cybersecurity Policy Report, FINANCIAL TECHNOLOGY—Blockchain users, federal agencies file appellate briefs in ‘Tornado Cash’ privacy case, (Mar 15, 2024)

By Ursula Furi-Perry, J.D., MBA

The Ethereum blockchain users argue that OFAC’s designation of Tornado Cash was unlawful, since the government failed to designate a foreign national or person and included immutable smart contracts that are not “property.”

A group of plaintiffs filed their appellate briefs with the U.S. Court of Appeals for the Fifth Circuit in a case involving the Ethereum blockchain’s “Tornado Cash” privacy protocol, and various government entities have submitted their response brief. The lawsuit was brought by a group of users of the Ethereum blockchain against the Treasury Department and Treasury’s Office of Foreign Assets Control (OFAC) over OFAC’s designation of Tornado Cash, a privacy protocol, to the Specially Designated Nationals and Blocked Persons List. Janet Yellen, in her official capacity as Secretary of the Treasury, and Andrea M. Gacki, in her official capacity as Director of the Office of Foreign Assets Control were also named defendants. The Ethereum users’ complaint alleged that the OFAC designation was an “unprecedented, overbroad action [that] exceeds Defendants’ statutory authority, infringes on Plaintiffs’ constitutional rights, and threatens the ability of law-abiding Americans to engage freely and privately in financial transactions.” (See Banking and Finance Law Daily, Sept. 9, 2022).

The U.S. district court for the Western District of Texas (Austin) granted summary judgment for the government, noting: “OFAC’s designation of Tornado Cash does not exceed its statutory powers and is not plainly inconsistent with its regulations” (see Banking and Finance Law Daily, Aug. 21, 2023) The court also rejected the plaintiffs’ First Amendment argument that the designation prohibits them from using the Tornado Cash software to make donations to political or social causes. The First Amendment does not protect the right to make donations through a particular bank or service, the court held, adding, among other things, that the plaintiffs did not explain “how the designation prevents them from using other services that may allow them privacy for their transactions” involving donations to causes. The plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit, where both sides submitted their briefs.

In their brief, the plaintiffs-appellants argued that the designation was unlawful, as the government failed to designate a foreign national or person, despite being required to identify a group that has demonstrated an agreement to pursue a common purpose. Although the government chose to define the Tornado Cash “entity” to include the Tornado Cash DAO, and to define DAO membership broadly to include anyone who possesses one of the 1.5 million outstanding TORN tokens in circulation, the plaintiffs-appellants argued that group of individuals has not demonstrated any common purpose. “It is undisputed that people may hold TORN for any number of reasons, including as a passive financial investment, without contributing to the development of the Tornado Cash software project or even using the Tornado Cash software. People can thus be members of the DAO without sharing a common purpose—the essential requirement of an unincorporated association,” the appellants’ brief noted.

Moreover, the appellants argued, even if the Department had identified a foreign “national” or a sanctioned “person,” the designation would still be unlawful because it included immutable smart contracts that are not “property.” Property must be something that can be owned, the appellants stated, and the immutable smart contracts are not capable of being owned. Lastly, the appellants argued that the designation is unlawful because the purported Tornado Cash entity has no ‘interest’ in the immutable smart contracts.

In their appellate brief, the government agencies countered that OFAC reasonably blocked transactions involving Tornado Cash’s smart contracts, given Tornado Cash’s support for North Korea and malicious cybercriminals. OFAC’s actions were consistent with the agency’s authority, the government’s brief noted, as the agency had authority to block “any property in which any foreign country or a national thereof has any interest” and found Tornado Cash to be an entity under relevant laws.

“As OFAC explained, Tornado Cash is a corporation in all but name, with a core developer group that functions as a board of directors and a Decentralized Autonomous Organization that functions as a group of stockholders. The DAO’s members hold a digital asset called TORN that operates like stock. Only TORN holders may vote on Tornado Cash’s governance decisions and receive a share of the fees that Tornado Cash charges. Additionally, the value of TORN is correlated with the success and widespread adoption of Tornado Cash, just like the value of a public company’s stock is correlated with the success and widespread adoption of that company’s services. The core developer group and the DAO therefore share the common purpose of profiting from the mixing service that Tornado Cash provides,” the government’s brief explained. The government agencies also argued in their brief that the plaintiff’s arguments lack merit, and that substantial evidence supported OFAC’s conclusion that Tornado Cash has an interest in smart contracts.

Attorneys: Kannon K. Shanmugam (Paul, Weiss, Rifkind, Wharton & Garrison, L.L.P.) for Joseph Van Loon, Tyler Almeida, Alexander Fisher and Preston Van Loon. Michael Shih, U.S. Department of Justice, for Department of the Treasury, Office of Foreign Assets Control and Janet Yellen.

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