Treasury Department sanction against virtual currency mixer challenged at 11th Circuit

ATLANTA (CN) —A cryptocurrency advocacy organization took its fight against the U.S. Treasury Department to the 11th Circuit on Tuesday, telling a panel of the appeals court that the government overstepped its authority in sanctioning virtual currency mixer Tornado Cash and unfairly banned Americans from using the software tool.

A Florida federal judge last year rejected the challenge brought by nonprofit crypto advocacy firm Coin Center and three individuals who use Tornado Cash. The plaintiffs say the Treasury’s Office of Foreign Assets Control (OFAC) violated their rights of association under the First Amendment and exceeded its authority to ban transactions involving foreigners’ interests in property.

Tornado Cash has helped launder more than $7 billion worth of virtual currency since its creation in 2019, according to the Treasury. The mixing service combines various digital assets, including potentially illegally and legitimately obtained money, allowing users to obscure the origins of stolen funds.

The company was designated as a “blocked person” in November 2022 by OFAC after the government found it had laundered hundreds of millions of dollars of cryptocurrency stolen by hacking groups sponsored by North Korea. Some of the laundered funds have reportedly benefitted North Korea’s nuclear and missile programs.

An attorney for the plaintiffs asked an 11th Circuit panel to overturn the lower court’s decision upholding the ban, arguing that his clients’ transactions do not involve foreign property or indirectly benefit foreigners.

The panel appeared split on Tuesday, with the judges struggling to grasp the often-complicated jargon associated with cryptocurrency operations. One judge questioned whether the challenge could even stand in light of the serious national security concerns raised by Tornado Cash’s operations.

“The [International Emergency Economic Powers Act] says the president has the sweeping and unqualified authority… to permit the Department of Treasury to block these transactions that affect national security,” U.S. Circuit Judge Charles Wilson, a Bill Clinton appointee, said.

Arguing on behalf of the plaintiffs, attorney Jeffrey Hetzel of Consovoy McCarthy admitted that bad actors could still use Tornado Cash to launder money but told the panel the issue is separate from his clients’ claims.

“This case is about whether OFAC can put our plaintiffs in prison for using their own property in a way that doesn’t involve North Korea at all,” Hetzel said. “These are Americans who just want privacy in their lawful activities and OFAC’s ban means they would go to prison for 20 years for doing that.”

The plaintiffs in the case have said they want to use Tornado Cash as a tool to keep their crypto transactions private. One plaintiff uses the software to protect his charitable donations for Ukrainian aid and two others, who receive part of their salaries in cryptocurrency, wish to use the service to withdraw assets to private digital “wallets” without revealing personal information to their employers.

The plaintiffs are challenging the ban as it relates to 29 of 91 digital account addresses affiliated with Tornado Cash, claiming those addresses are not property in which a foreigner has any interest.

But an attorney for the government argued the plaintiffs’ use of Tornado Cash’s service cannot be cleanly separated from the service as a whole.

Justice Department attorney Brad Hinshelwood told the panel that foreigners own Tornado Cash crypto tokens, giving them some control over the mixing service’s success or failure. The government has also argued that the organization controlling Tornado Cash’s operations, known as a decentralized autonomous organization or DAO, includes foreigners who have a financial interest in the increased use and popularity of the software.

“The efficacy of the service depends on the number of people using the service,” Hinshelwood said. “The more people who are putting crypto in these pools and taking money out of these pools, the more effective the mixing service is going to be… If fewer people are using the service it’s going to be less effective, that’s the whole point and it’s also going to impact the interest these foreign nationals have.”

Hetzel told the panel that there are no foreigners with a “qualifying interest” in his clients’ transactions even though two of Tornado Cash’s three founders are Russian nationals.

“Our clients are Americans. They own their cryptocurrency 100%. The software can’t be controlled by these foreigners. Our American plaintiffs don’t pay them a penny and then our plaintiffs get the cryptocurrency right back,” Hetzel explained. “It’s purely an American transaction… The only property is the software [and] the software is just lines of code published to the internet that anyone can own or control.”

The Justice Department last year indicted Tornado Cash co-founders Roman Semenov and Roman Storm on charges including conspiracy to commit money laundering and operating an unlicensed money transmitting business. Alexey Pertsev, a third co-founder of Tornado Cash, was convicted of money laundering in the Netherlands and sentenced in May to 64 months in jail.

Wilson was joined on Tuesday’s panel by fellow Clinton appointee Senior U.S. Circuit Judge Frank Hull and U.S. Circuit Judge Andrew Brasher, an appointee of Donald Trump.

The panel did not indicate when it would issue a decision in the appeal.

Follow @KaylaGoggin_CNS