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On the Tornado Cash Arrest

What happened:

Code is recognized as speech:

  • Per the cryptography wars of 30 years ago, code is legally recognized as speech.
    • In Daniel Bernstein v US 9th Circuit, 1999, the district court found that the Source Code was speech protected by the First Amendment.
  • This was supported by the subsequent ruling that clarified,

    The fact that a medium of expression has a functional capacity should not preclude constitutional protection. Code is an expressive means for the exchange of information and ideas.
    ~ Junger v Daley (6th Circuit, 2000)
    (Bernstein v. USDOJ (9th Cir. May 6, 1999))

  • The arrest of Alexey Pertsev, and the subsequent delisting of the Tornado Cash organization is in dangerous contradiction of that precedent.

Thirty years of hard legal work to establish first amendment protections around software distribution, blown up in a day by Github/Microsoft.
~ Matthew Green https://twitter.com/matthew_d_green/status/1556766032882110464

On prior arrests, and non-custodial mixers:

Not the first time a privacy application developer has been arrested.

On Coin Center's announcement

Yesterday (Aug 15 2022), Coin Center released a statement asserting that "[sanctioning Tornado Cash] potentially violates constitutional rights to due process and free speech, and that OFAC has not adequately acted to mitigate the foreseeable impact its action would have".
Their argument hinges on the issue of the applications non-custodial lack of agency after deployment:

The Tornado Cash Entity [developers], which presumably deployed the Tornado Cash Application, has zero control over the Application today. Unlike Blender, the Tornado Cash Entity can’t choose whether the Tornado Cash Application engages in mixing or not, and it can’t choose which “customers” to take and which to reject.

They continue with reference to the 2019 FinCEN guidance (albeit noting that OFAC is not bound by FinCEN):

In its May 2019 guidance document on virtual currency business models, the Financial Crimes Enforcement Network (FinCEN) draws a distinction between “providers of anonymizing services” (including “mixers”) and “anonymizing software providers”. They make it clear that service providers are subject to Bank Secrecy Act Obligations while software providers are not.

Coin Center concludes that, while the TC Entity is a person and subject to sanctions, sanctioning the application is novel, and contradicts previous DoT guidance.

(Analysis: What is and what is not a sanctionable entity in the Tornado Cash case - Coin Center)

Assorted quotes:

DoT OFAC statement exerpt:

U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash | U.S. Department of the Treasury

Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned virtual currency mixer Tornado Cash, which has been used to launder more than $7 billion worth of virtual currency since its creation in 2019. This includes over $455 million stolen by the Lazarus Group, a Democratic People’s Republic of Korea…Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them

Tornado is being designated pursuant to E.O. 13694, as amended, for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, a cyber-enabled activity originating from, or directed by persons located, in whole or in substantial part, outside the United States that is reasonably likely to result in, or has materially contributed to, a significant threat to the national security, foreign policy, or economic health or financial stability of the United States and that has the purpose or effect of causing a significant misappropriation of funds or economic resources, trade secrets, personal identifiers, or financial information for commercial or competitive advantage or private financial gain.
(Cyber-related Designation | U.S. Department of the Treasury)

On precedent:

The Treasury Department’s action Monday against Tornado Cash, a platform based on open-source, self-running software protocols, is unprecedented, crypto industry participants add, as the U.S. has previously only sanctioned wallet addresses and centralized services.

On block:

a total of roughly $424.28 million in digital assets were blocked from transacting

On laundering:

The U.S. Treasury Department accused Tornado Cash, a so-called mixer platform that enables users to exchange cryptocurrencies with relative anonymity, of laundering billions of dollars in virtual currency, including $455 million allegedly stolen by North Korean hackers

Tim Robinson, co-founder of Blockchain analytics firm Elliptic, said it found at least $1.5 billion in proceeds of crime such as ransomware, hacks and fraud, laundered through Tornado Cash
(U.S. Sanctions Crypto Platform Tornado Cash, Says It Laundered Billions - WSJ)
(Tornado Cash’s Sanctions Show Shift in Crypto Regulatory Focus - WSJ)

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