The Latest on OFAC’s and the DOJ’s Efforts to Target Tornado Cash and Other Digital Currency Mixers
The Office of Foreign Assets Control (OFAC) made a rare appearance in national headlines when it sanctioned Tornado Cash on August 8, 2022. While OFAC is among the lesser-known federal law enforcement agencies, its profile has grown in recent years—due in part to the Office’s role in combating cryptocurrency-related crime.
Tornado Cash is what is known as a digital currency mixer. It processes cryptocurrency transactions similar to any other type of exchange; but, what is unique about a mixer is that it aggregates multiple users’ tokens in a single pot before redistributing them in accordance with users’ transaction instructions. This further enhances the anonymity of using cryptocurrency (which, the Internal Revenue Service (IRS) has shown, is not completely anonymous). While some users may have a legitimate interest in maintaining their anonymity, this also makes digital currency mixers attractive platforms for criminal enterprises.
This is where OFAC comes into play.
OFAC’s primary role is to protect national security and promote the United States’ foreign policy interests by regulating cross-border financial transactions. OFAC enforces the Bank Secrecy Act (BSA) and a host of other federal statutes and regulations, and it has the authority to impose sanctions prohibiting transactions with Specially Designated Nationals (SDNs) and other designated parties. After determining that Tornado Cash had been used by the Lazarus Group, a state-sponsored hacking syndicate of North Korea, to launder more than $455 million in stolen Ethereum, OFAC designated Tornado Cash as an SDN—just the second time it has imposed sanctions on a digital currency mixing platform.
“OFAC’s efforts to target Tornado Cash present concerns not only for other digital currency mixers, but also for all users of these platforms. Once a platform has been sanctioned, all U.S. persons are prohibited from conducting business with the platform—including withdrawing their funds—unless they are able to obtain a specific license from OFAC. Illegally conducting transactions on a sanctioned platform can lead to civil or criminal penalties.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
What makes OFAC’s sanctioning of Tornado Cash unique is that Tornado Cash isn’t a business entity, and it is no longer operated by specific individuals. Instead, it is an open-source platform that exists solely in the digital realm. The same is true of Blender.io, the first digital currency mixer that OFAC sanctioned on May 6, 2022. While OFAC has attempted to justify its sanctions by classifying Tornado Cash as an “organization” within the definition of a “person” under the International Emergency Economic Powers Act (IEEPA), it has faced legal challenges—but this hasn’t stopped it from continuing to target mixers and their users in 2023.
So, what’s the latest?
Legal Challenges to OFAC’s Authority to Sanction Tornado Cash Have Failed
In 2022, Coinbase employees, with the company’s financial backing, filed a lawsuit challenging OFAC’s authority to sanction Tornado Cash as a digital currency mixer. Advocates, including the Electronic Frontier Foundation (EFF), submitted amicus briefs arguing in favor of the Coinbase employees’ position. Among other things, these advocates argued that sanctioning the platform amounted to a violation of coders’ First Amendment rights.
However, these efforts to challenge OFAC’s authority failed. On August 17, 2023, the U.S. District Court for the Western District of Texas issued a decision dismissing the Coinbase employees’ lawsuit, effectively affirming OFAC’s authority to sanction Tornado Cash—and to sanction other digital currency mixers by extension.
As is so often the case with legal matters involving cryptocurrency, there is no law directly on point. OFAC’s authority to issue the economic sanctions at issue arises out of the IEEPA, a federal statute that Congress enacted in 1977 during the Carter administration. Under the IEEPA, OFAC has the authority to sanction any “person” that presents a threat to national security or the United States’ foreign policy interests. The IEEPA defines a “person” as, “a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization.”
To justify its sanctions, OFAC has classified Tornado Cash as an “other organization” under IEEPA. As it explains in an FAQ published on November 8, 2022:
“OFAC designated . . . Tornado Cash . . . [as] a ‘partnership, association, joint venture, corporation, group, subgroup, or other organization’ that may be designated pursuant to [the International Emergency Economic Powers Act (IEEPA)]. Tornado Cash’s organizational structure consists of: (1) its founders and other associated developers, who together launched the Tornado Cash mixing service, developed new Tornado Cash mixing service features, created the Tornado Cash Decentralized Autonomous Organization (DAO), and actively promoted the platform’s popularity in an attempt to increase its user base; and (2) the Tornado Cash DAO, which is responsible for voting on and implementing new features created by the developers.”
While cryptocurrency advocates have argued that (i) Tornado Cash’s founders are no longer involved with the platform, (ii) the “other associated developers” are unorganized individuals who use the platform’s open-source code, and (iii) the very nature of a DAO suggests a lack of organization, to date these arguments have failed to gain traction both at the administrative level and in federal court.
OFAC and the DOJ Target Tornado Cash’s Founders (and Signal Efforts to Target Others)
More than a year after designating Tornado Cash, OFAC announced the designation of one of the platform’s co-founders. OFAC added Roman Semenov to the SDN List on August 23, 2023. As OFAC’s press release announcing Semenov’s designation explains, its sanctioning efforts were conducted in coordination with the DOJ, which announced the unsealing of an indictment against Semenov and a second co-founder of Tornado Cash, Roman Storm, the same day.
According to OFAC, “Even after they knew the Lazarus Group was laundering hundreds of millions of dollars’ worth of stolen virtual currency through their mixing service for the benefit of [North Korea], Tornado Cash’s founders continued to develop and promote the service and did not take meaningful steps to reduce its use for illicit purposes.” The DOJ’s press release echoes these allegations, stating that Semenov, Storm, and Tornado Cash “operated a $1 billion scheme designed to help other criminals launder and conceal funds using cryptocurrency, including by laundering hundreds of millions of dollars on behalf of a state-sponsored North Korean cybercrime group sanctioned by the U.S. government.” Semenov and Strom are facing charges of conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money transmitting business; and, if convicted, face substantial fines and decades of federal imprisonment.
Crucially, in announcing their latest enforcement efforts, both OFAC and the DOJ signaled their intent to continue targeting digital currency mixers, their founders, and their users—while working in close coordination with their other federal law enforcement partners. For example, the DOJ’s press release quotes FBI Director Christopher Wray as stating, “As we have with this operation, the FBI is going to keep dismantling the infrastructure used by cyber criminals to commit and profit from their crimes, and holding anyone who assists those criminals accountable.”
What Cryptocurrency Platforms, Investors, and Others Need to Know in 2023 (and Beyond)
With all of this in mind, what do cryptocurrency platforms (including, but not limited to, digital currency mixers), investors, and others need to know going forward? Here are some key takeaways from OFAC’s efforts to target Tornado Cash and its co-founders:
- Combating Money Laundering on Cryptocurrency Platforms is a Top Federal Law Enforcement Priority – OFAC’s and the DOJ’s efforts to target platforms like Tornado Cash make clear that combating money laundering on cryptocurrency platforms is a top federal law enforcement priority. The Financial Crimes Enforcement Network (FinCEN) and other federal authorities are actively targeting cryptocurrency-related anti-money laundering (AML) violations as well.
- More Investigations, Sanctions, and Charges Are Likely Forthcoming – Given the federal government’s focus on digital currency mixers, more investigations are likely forthcoming. These investigations will almost certainly lead to additional sanctions and criminal charges for conspiracy to commit money laundering and other crimes.
- OFAC Sanctions Can Impact Legal Cryptocurrency Investors – All U.S. persons are prohibited from dealing with sanctioned entities. This includes legal cryptocurrency investors who used Tornado Cash, and who must now obtain a specific license from OFAC in order to withdraw their funds from the platform.
- A Proactive Approach to OFAC Compliance is Paramount – Going forward, a proactive approach to OFAC compliance will be paramount for all entities and individuals that use (or operate) digital currency mixers or other platforms. A proactive approach to AML compliance will be critical as well. While OFAC compliance and AML compliance overlap in limited respects, each requires a focused, comprehensive, and custom-tailored approach.
- Violating OFAC Sanctions Can Have Serious Consequences for Companies and Individuals – If the DOJ determines that an OFAC sanctions violation or AML violation was willful, it can pursue criminal charges under the BSA and other federal laws. These charges can lead to both substantial fines and long-term federal imprisonment. Even if a targeted entity or individual can prove that its violation was non-willful, it can still face civil monetary penalties from OFAC.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.