Why OFAC Delisted Tornado Cash
The United States of America Department of the Treasury’s Office of Foreign Assets Control (OFAC) took a significant step by delisting Tornado Cash, a controversial cryptocurrency mixer, from its Specially Designated Nationals and Blocked Persons (SDN) List. This decision, which was a reversal of the initial sanctions that were imposed in August 2022, sent ripples throughout the cryptocurrency industry. It sparked discussions regarding regulatory overreach, the nature of decentralized technology, and how to strike a balance between privacy and security in the digital asset space. Although the delisting has been hailed by some as a victory for code and privacy, it does not necessarily indicate a complete shift in OFAC’s approach to regulating cryptocurrencies because it is based on a complicated legal battle. The legal difficulties, specifics of the ruling, and potential repercussions for the regulation of cryptocurrencies in the future will all be examined in this article in relation to OFAC’s decision to delist Tornado Cash.
The Initial Sanctions and Their Justification
To understand the significance of the delisting, it’s crucial to recall why Tornado Cash was initially sanctioned. In August 2022, OFAC added Tornado Cash to the SDN list, effectively prohibiting U.S. persons from interacting with the platform. The fact that Tornado Cash had been used to launder billions of dollars’ worth of virtual currency, including substantial sums stolen by the Lazarus Group, a North Korean state-sponsored hacking group, was the justification for this drastic action. OFAC asserted that Tornado Cash facilitated these illicit activities by obscuring the origin and destination of funds, thereby undermining efforts to combat money laundering and other financial crimes.
The sanctions were based on Executive Order 13694, which targets malicious cyber-enabled activities, and later reinforced by Executive Order 13722, focusing on North Korea. OFAC argued that Tornado Cash, despite being a decentralized protocol comprised of smart contracts, constituted a “person” or “entity” whose property and interests in property were blocked due to its role in facilitating illicit finance. This marked the first time OFAC had directly sanctioned a decentralized, open-source protocol, raising immediate concerns within the cryptocurrency community about the scope of regulatory authority over such technologies.
The Dispute in Court: Van Loon v. Treasury’s Department of Finance There were swift legal challenges to Tornado Cash’s sanctions. Under the direction of Joseph Van Loon, a group of Tornado Cash users filed a lawsuit against OFAC, claiming that the agency had violated their constitutional rights and had overstepped its statutory authority. The core of their argument rested on the premise that Tornado Cash was not a person or entity in the traditional sense but rather a set of immutable smart contracts – lines of code deployed on the Ethereum blockchain. They contended that these smart contracts were not “property” of a foreign national or entity and therefore could not be blocked under the International Emergency Economic Powers Act (IEEPA), the statute under which OFAC had acted.
The District Court initially sided with OFAC, upholding the sanctions. However, on November 26, 2024, the plaintiffs filed an appeal with the Fifth Circuit Court of Appeals, which issued a landmark decision. The Fifth Circuit overturned the lower court’s decision, finding in favor of the plaintiffs. The appellate court ruled that OFAC had “overstepped its congressionally defined authority” by sanctioning Tornado Cash’s smart contracts because “immutable smart contracts… are not the ‘property’ of a foreign national or entity.” The court reasoned that the software code itself did not meet the legal definition of property that could be blocked under IEEPA.
This ruling was a significant blow to OFAC’s approach to regulating decentralized protocols. It established a legal precedent suggesting that open-source software and self-executing smart contracts, in their pure form, might fall outside the scope of OFAC’s sanctions authority under IEEPA.
The Response of OFAC: Delisting and Its Consequences The legal landscape surrounding the Tornado Cash sanctions changed dramatically following the Fifth Circuit’s decision. Even though the decision did not explicitly say that Tornado Cash should be taken off the SDN list, it significantly undermined the legal justification that OFAC had originally given for keeping it there. Faced with this legal setback, the Treasury Department filed a motion in the District Court on March 18, 2025, requesting a stay of the case while OFAC delisted Tornado Cash. OFAC argued that the delisting would render the case moot, as the plaintiffs would no longer be subject to the sanctions they were challenging. On March 21, 2025, OFAC officially announced the delisting of Tornado Cash from the SDN list.
However, OFAC carefully framed its decision to remove Tornado Cash from its list. “[b]ased on the Administration’s review of the novel legal and policy issues raised by use of financial sanctions against financial and commercial activity occurring within evolving technology and legal environments,” the Treasury Department stated in its announcement of the delisting. This suggests that, while the Fifth Circuit’s decision was significant, OFAC also took into account broader policy implications and the changing cryptocurrency industry. It is crucial to note what the delisting does and does not entail:
Removal from the SDN List: The primary effect of the delisting is that U.S. persons are no longer broadly prohibited from interacting with the Tornado Cash protocol itself. This means that using Tornado Cash smart contracts to send or receive cryptocurrency is no longer automatically considered a violation of U.S. sanctions. No Endorsement of Illicit Activity: OFAC’s delisting should not be interpreted as an endorsement of the use of cryptocurrency mixers for illicit purposes. The Treasury Department explicitly stated its continued commitment to using its authorities to combat illicit finance in the digital asset ecosystem.
OfAC emphasized its ongoing concerns regarding the use of mixers by malicious actors, particularly state-sponsored hackers. Future Potential Actions The statement of delisting left the door open for future actions against individuals or organizations involved in facilitating illicit activity through mixers, or even the re-designation of Tornado Cash under a different legal justification in the event that the circumstances change. The Tornado Cash protocol’s delisting has no effect on the sanctions that are still in place against Roman Semenov, one of the protocol’s founders. He continues to be listed on the SDN list, albeit with a modified designation that no longer explicitly mentions cyber-enabled activities but retains the North Korea-related designation. In addition, Semenov and another co-founder, Roman Storm, are being prosecuted for money laundering and sanctions violations related to Tornado Cash’s operations. Why not appeal again but delist? There are a number of concerns regarding OFAC’s decision to remove Tornado Cash from its list rather than pursuing a subsequent Supreme Court appeal. While the Treasury Department has not explicitly stated its reasoning, several factors likely contributed to this decision:
Strength of the Fifth Circuit Ruling: The Fifth Circuit’s unanimous ruling against OFAC presented a significant legal hurdle. There was no assurance that the higher court would overturn the appellate decision, and the process of appealing to the Supreme Court is complicated and uncertain. Concentrate on Regulatory Clarity: The cryptocurrency industry may have been further entangled if a protracted legal battle over the sanctioning of a decentralized protocol based on its code continued. Delisting Tornado Cash, while acknowledging the legal constraints identified by the Fifth Circuit, allows OFAC to reassess its regulatory approach and potentially explore alternative methods for addressing illicit finance in the digital asset space.
Preserving Discretion: OFAC preserves a degree of discretion by delisting Tornado Cash “based on the Administration’s review” rather than solely on the basis of the court’s decision. This prevents the agency from establishing a binding legal precedent that would completely prevent the approval of similar decentralized protocols in the future under various circumstances or legal justifications. Allocation of Resources: Legal disputes, particularly those that have the potential to reach the Supreme Court, are costly and time-consuming. OFAC may have decided to allocate its resources to other areas of concern within the cryptocurrency space, such as enforcement actions against specific individuals and entities involved in illicit activities.
The Plaintiffs’ Response and Lingering Legal Issues
While the delisting was seen by many in the cryptocurrency community as a victory, the plaintiffs in the Van Loon case were quick to respond with caution. They argued that OFAC’s delisting was a tactical maneuver to avoid a final judgment from the District Court that would solidify the Fifth Circuit’s ruling and potentially limit OFAC’s future ability to sanction similar technologies.
The plaintiffs asserted that the case was not moot and that the District Court should still enter a judgment based on the Fifth Circuit’s mandate. Their concern was that OFAC could potentially re-designate Tornado Cash in the future under a different rationale if a clear legal precedent limiting its authority is not established.
As of early April 2025, the legal back-and-forth continues, with the District Court yet to issue a final judgment. The plaintiffs are seeking a definitive ruling that affirms the limitations on OFAC’s authority to sanction open-source software and immutable smart contracts.