A federal judge ruled against a group of Coinbase-backed investors and developers last week who alleged the U.S. Treasury Department overstepped its authority in sanctioning Tornado Cash. In doing so, he found that Tornado Cash had a DAO that could be sanctioned.
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Stormy precedent
The narrative
Tornado Cash wasn’t really a good case for the crypto industry. It was definitely used by North Korea to launder stolen crypto, and now a federal judge has ruled that it was designated properly by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC).
Why it matters
This is the second case where the existence of a decentralized autonomous organization (DAO) was used to find that a federal regulator was within its limits to bring an enforcement action against a crypto entity.
Breaking it down
The Treasury was well within its bounds to sanction Tornado Cash, barring all U.S. persons (U.S. citizens worldwide and residents in the U.S. itself) from transacting with or otherwise using the service, a federal judge ruled last week.
Judge Robert Pitman, of the Western District of Texas, said in a relatively brief written order that plaintiffs – including Prysmatic Labs co-founder Preston Van Loon, Ethereum supporter Alex Fisher, Coinbase employees Tyler Almeida and Nate Welch and a few others – had not successfully argued that their First Amendment rights or the Administrative Procedures Act had been violated.
Tornado Cash was sanctioned just over a year ago by OFAC, which alleged the mixer – which obscures the transaction history of crypto tokens by mixing all users’ money together – was an important tool for North Korea’s Lazarus Group.
Lazarus is perhaps most famously accused of using social engineering to steal more than $600 million in crypto from Axie Infinity’s Ronin Bridge.
In his order, Judge Pitman discussed the differing views on the role of the DAO governing Tornado Cash, the characterization of the smart contracts making up the mixer, the role of a relayer in the process and even the difference of opinion on whether Tornado Cash is the software itself or the DAO running it.
“It is undisputed that Tornado Cash uses smart contracts to provide a layer of privacy for its users by allowing them to deposit crypto assets in one wallet and then withdraw assets from a different wallet. Plaintiffs claim that as of 2020, the smart contracts are immutable, autonomous software applications with no custodial operator that automatically check the inputs necessary for a valid transaction, allowing withdrawals without human intervention,” he noted. “However, the government states that these smart contracts are created by Tornado Cash developers and then approved and deployed by the DAO, to provide customers with virtual currency mixing services on multiple blockchains.”
In his ruling, the judge found that Tornado Cash does meet the bar for being seen as an entity. Specifically, it’s an association composed of the project’s founders, developers and the DAO. OFAC sanctioned both the software itself and the group of people behind it in its order last year, he said.
This isn’t the first time a DAO was found to be an organization for court purposes by a federal court. Judge William Orrick, in the Northern District of California, found that Ooki DAO was an unincorporated association for the purposes of a Commodity Futures Trading Commission lawsuit.
The judge also found that Tornado Cash did have a property interest in the smart contracts, pointing to fees generated in TORN tokens as one example.
“Even if not every smart contract can be considered a contract, the record shows that Tornado Cash promoted and advertised the contracts and its abilities and published the code with the intention of people using it – hallmarks of a unilateral offer to provide services,” he wrote.
He also pushed back against the idea that code is abstract, saying the code for Tornado Cash’s smart contracts were not only deployed, but “convey[ed] an ongoing benefit … in the form of fees transmitted to the DAO.”
Coinbase Chief Legal Officer Paul Grewal has already said the exchange, which funded the original lawsuit, would support an appeal.
The question, then, is what sort of precedent we’ll ultimately see with DAOs and their role overseeing crypto projects.
And, in the meantime, OFAC still faces another suit from Coin Center over the Tornado Cash sanctions.
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