Court Bars OFAC From Reimposing Sanctions On Tornado Cash

A federal court in the United States has ruled that the Treasury Department's Office of Foreign Asset Control (OFAC) cannot reinstate sanctions on Tornado Cash. This decision comes after OFAC initially removed Tornado Cash from its sanctions list in March, following an appeals court ruling. The court's decision bars OFAC from quietly delisting Tornado Cash and then sanctioning it later, effectively preventing the Treasury from reimposing sanctions on the cryptocurrency mixer.

Judge Robert Pitman of the Austin federal court stated in an April 28 judgment that OFAC’s sanctions on Tornado Cash were unlawful and that the agency was “permanently enjoined from enforcing” sanctions. This ruling follows a lawsuit filed by Tornado Cash users led by Joseph Van Loon, who argued that OFAC’s addition of the platform’s smart contract addresses to its Specially Designated Nationals and Blocked Persons (SDN) list was “not in accordance with law.”

OFAC had initially sanctioned Tornado Cash in August 2022, accusing the protocol of helping launder crypto stolen by the North Korean hacking collective, the Lazarus Group. The agency dropped the platform from the sanctions list on March 21 and argued that the matter was “moot” after a court ruled in favor of Tornado Cash in January. However, this latest amended ruling prevents OFAC from re-sanctioning Tornado Cash or putting it back on the blacklist.

Initially, the court denied a motion for partial summary judgment and granted in favor of the Treasury. However, the Fifth Circuit reversed the decision and instructed the lower court to grant partial summary judgment to the plaintiffs, which led to the sanctions being revoked. In March, the Treasury argued there was no need for a final court judgment in the lawsuit.

The ruling is a significant blow to OFAC, which had previously sanctioned Tornado Cash for allegedly facilitating money laundering and other illicit activities. The court's decision underscores the legal complexities surrounding cryptocurrency regulation and the challenges faced by regulatory bodies in enforcing sanctions on decentralized financial systems. The court's ruling also highlights the importance of due process and legal transparency in the enforcement of sanctions, ensuring that regulatory actions are subject to judicial oversight.

The decision is likely to have broader implications for the cryptocurrency industry, as it sets a precedent for how sanctions can be enforced on decentralized financial systems. It also raises questions about the effectiveness of OFAC's sanctions regime and the need for clearer guidelines on how sanctions can be applied to cryptocurrency platforms. The ruling is a victory for Tornado Cash and its users, who had argued that the sanctions were unjustified and violated their constitutional rights. The decision is also a reminder of the ongoing debate surrounding cryptocurrency regulation and the need for a balanced approach that protects both investors and the integrity of the financial system.