Treasury Drops Tornado Cash Sanctions, Court Battle Continues

The US Treasury Department has asserted that a final court judgment is not necessary in the lawsuit concerning its sanctioning of Tornado Cash, following the removal of the crypto mixer from the sanctions list. In August 2022, the Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions on Tornado Cash, alleging that the protocol facilitated the laundering of cryptocurrency stolen by the North Korean hacking group, the Lazarus Group. This action led to a lawsuit filed by several Tornado Cash users against the regulator.

Following a court ruling in favor of Tornado Cash, the US Treasury removed the mixer from its sanctions list on March 21, along with several dozen Tornado-affiliated smart contract addresses from the Specially Designated Nationals (SDN) list. The Treasury now argues that "this matter is now moot" because Tornado Cash has been delisted from the sanctions list. The Treasury Department stated that "because this court, like all federal courts, has a continuing obligation to satisfy itself that it possesses Article III jurisdiction over the case, briefing on mootness is warranted."

However, Coinbase's chief legal officer, Paul Grewal, contended that the Treasury's attempt to declare the case moot before an official judgment is made does not align with the correct legal process. Grewal argued that under the voluntary cessation exception, a defendant’s decision to end a challenged practice moots a case only if the defendant can show that the practice cannot "reasonably be expected to recur." He cited a 2024 Supreme Court ruling that found a legal complaint from Yonas Fikre, a US citizen who was put on the No Fly List, is not moot by taking him off the list because the ban could be reinstated again at a later date. Grewal pointed out that the Treasury has removed the Tornado Cash entities from the SDN list but has not provided any assurance that it will not relist Tornado Cash again, which he believes is insufficient and will be made clear to the district court.

Six Tornado Cash users, led by Ethereum core developer Preston Van Loon, with the support of Coinbase, sued the Treasury in September 2022 to reverse the sanctions, arguing that they were unlawful. A crypto policy advocacy group followed through with a similar suit in October 2022. In August 2023, a Texas federal court judge sided with the US Treasury, ruling that Tornado Cash was an entity that may be designated per OFAC regulations. On appeal, a three-judge panel ruled in November that Treasury’s sanctions against the crypto mixer’s immutable smart contracts were unlawful. The US Treasury had a 60-day window to challenge the decision, which it did; however, the US court sided with Tornado Cash, overturning the sanctions on Jan. 21 and forcing the government agency to remove the sanctions by March.

Despite the delisting of Tornado Cash, its founders continue to face legal challenges. The US charged Roman Storm and fellow co-founder Roman Semenov in August 2023, accusing them of helping launder over $1 billion in crypto through Tornado Cash. Semenov remains at large and is on the FBI’s most wanted list, while Storm is free on a $2 million bond and is expected to face trial in April. Meanwhile, Tornado Cash developer Alexey Pertsev was released from prison after a Dutch court suspended his “pretrial detention” as he prepared to appeal his money laundering conviction.