Crypto bros, money launderers celebrate Tornado Cash ruling

Getting your Trinity Audio player ready...

Tornado Cash won a key court decision that has crypto bros, software developers, hackers, and money launderers cheering all the way from Texas to Pyongyang.

On November 26, the U.S. Court of Appeals for the Fifth Circuit issued a ruling supporting six users of the Ethereum-based Tornado Cash, a ‘coin mixing’ service that allows users to obfuscate ETH tokens’ digital trail.

The appeal came following the sanctions imposed on Tornado Cash in August 2022 by the Department of the Treasury’s Office of Foreign Assets Control (OFAC), which accused the mixer of helping to launder billions of dollars in illicit proceeds for criminals like North Korea’s notorious Lazarus Group.

The six Tornado Cash users challenged the sanctions, arguing that the inclusion of Tornado Cash property—including the service’s smart contracts—on the Specially Designated Nationals and Blocked Persons (SDN) list exceeded the authority granted to OFAC under the International Emergency Economic Powers Act (IEEPA). This challenge was rejected by a federal court, but this rejection has now been reversed by the Fifth Circuit, which granted the plaintiffs’ motion for partial summary judgment.

The court ruled that OFAC’s definition of ‘property’ didn’t apply to Tornado Cash’s admin-free smart contracts “because they are incapable of being owned.” Since OFAC requires property to be ownable, “the immutable smart contracts are beyond the scope of OFAC’s blocking power.”

The court also rejected OFAC’s argument that Tornado Cash “profits from—and therefore has an interest in—the smart contracts.” The logic here is that while some Tornado Cash’ relayers’ and holders of the service’s TORN token might receive fees, the same can’t be said for the service itself or the developers behind its smart contracts.

Contract law requires an agreement between two or more parties, but Tornado Cash’s smart contracts “have only one party in play,” with the other end of that deal being “software code,” meaning “there is no party with which to contract.” The decision by the Tornado Cash developers to make the service’s smart contracts run “independently and autonomously” means the service “does not—and cannot—own or control them.”

It’s worth noting that the Fifth Circuit has a reputation for using extremely dodgy legal arguments to uphold any and all challenges to anything done/said/contemplated by the federal government. To the point that the highly conservative U.S. Supreme Court has had to smack down multiple Fifth Circuit rulings due to their legal reasoning failing to survive even cursory scrutiny.

That said, the Fifth Circuit’s ruling followed this summer’s U.S. Supreme Court rejection of the so-called ‘Chevron deference’ that previously offered federal agencies a broad license to interpret how Congress intended them to act within their respective briefs. Armed with this new freedom to push back on federal agencies, one should expect a lot more Fifth Circuit rulings of this sort.

So, any crypto outfit that hasn’t yet registered a shell company and/or rented a mailbox in the Lone Star State so they can claim jurisdiction and appeal their court losses to the Fifth Circuit—seriously, what are you waiting for?

All who cares

The ruling led to a massive surge in the fiat price of the TORN token, which enjoyed a ~9x surge to nearly $35 in the immediate aftermath of the ruling. While the token quickly surrendered much of those gains, it currently sits around the $20 mark, which is still ~6x where it was on November 25.

Crypto bros were popping champagne corks before the ink was dry on the Fifth Circuit’s ruling. Paul Grewal, chief legal officer at the Coinbase (NASDAQ: COIN) exchange, called the ruling “a historic win for crypto and all who cares [sic] about defending liberty.” (Coinbase helped fund the challenge and two of the plaintiffs worked for the exchange.)

The Fifth Circuit ruling was narrowly focused on smart contracts without admin keys, meaning Treasury/OFAC’s case against other aspects of Tornado Cash’s operations remains intact (although it will now be reconsidered by lower courts using the Fifth Circuit’s preferred view of how the law should be applied).

But Treasury will be getting a new secretary come January in the form of Scott Bessent, who this summer claimed to be “excited” about President-elect Donald Trump’s “embrace of crypto.” What this change at the top might portend for existing cases against digital asset operators remains to be seen.

For example, the federal criminal charges filed against Tornado Cash developers Roman Storm and Roman Semenov by the Department of Justice (DOJ) in August 2023 are proceeding apace. Storm is currently in U.S. custody, while Semenov is believed to be in Russia and thus beyond the DOJ’s reach.

Storm’s trial was recently delayed until April 2025. Shortly before the Fifth Circuit ruling, federal prosecutors filed a superseding indictment against Storm that seeks the forfeiture of his two homes in Washington state as well as a Tesla SUV, all of which the feds claim were bought with ill-gotten gains.

Across the pond, fellow Tornado Cash developer Alexey Pertsev is awaiting an appeal of the 64-month sentence a Dutch court imposed this spring after convicting Pertsev on money laundering charges. Last month, Pertsev tweeted that the court had rejected his bid to be released from custody while his appeal is pending. Unlike Storm, who used the Fifth Circuit ruling to appeal for more legal funding, Pertsev has yet to tweet his opinion on the development.

Pertsev might have considered himself fortunate given the sentence recently imposed on Roman Sterlingov, former operator of the Bitcoin Fog mixing service. Convicted this spring in the District of Columbia on money laundering charges, Sterlingov received a 12.5-year sentence on November 8. Prosecutors said the lengthy sentence “sends an unmistakable message: those who help criminals with online payments for their illegal activities will face serious penalties.”

La plus ça change…

Also celebrating the Fifth Circuit’s ruling are the hackers responsible for some major crypto thefts. Just days before the ruling, seven Democratic members of the House of Representatives penned a letter questioning Treasury officials as to why Tornado Cash “has remained online and continues to function as decentralized smart contracts.”

The letter claims that while Tornado Cash suffered as much as an 85% drop in transaction volume following the OFAC sanctions, the mixer has undergone a “resurgence” in 2024, with fund volume up 45% year-on-year. In other words, “this problem shows zero signs of going away anytime soon.”

A recent Global Ledger report found that “over 60%” of the ETH flowing through Tornado Cash this year was deemed to be ‘high risk’ while 56% came directly from hacks. Among the more notable crimes for which Tornado Cash helped drive the getaway car are this summer’s hack of the WazirX exchange and the late 2023 Heco Bridge exploit. These two thefts alone accounted for a combined $401 million in laundered ETH.

Keep striking those blows for ‘freedom,’ crypto bros.

Watch: Bringing the Metanet to life with Teranode