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

MoneroMonero
$146.10
‑0.64%
2M Ago
coincenter.org

Last Monday, the Treasury Department’s Office of Foreign Assets Control (OFAC) made a designation adding Tornado Cash to the Specially Designated Nationals And Blocked Persons (SDN) List that it administers. Hours after the designation, we posted our preliminary analysis of the action and said we believed it might be statutorily and constitutionally deficient. Over the last week we have had the time to conduct a fuller legal analysis, which we now present here.

As we suspected, we believe that OFAC has overstepped its legal authority by adding certain Tornado Cash smart contract addresses to the SDN List, that this action 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 on innocent Americans. We intend to work with other digital rights advocates to pursue administrative relief. We are also now exploring bringing a challenge to this action in court.

What Was Sanctioned Exactly

To understand the legal issues at stake in OFAC’s addition of the Tornado Cash smart contracts to the SDN List, it helps to first understand OFAC’s addition of Blender.io to the same list in May. The press release announcing those sanctions stated:

WASHINGTON – Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned virtual currency mixer Blender.io (Blender), which is used by the Democratic People’s Republic of Korea (DPRK) to support its malicious cyber activities and money-laundering of stolen virtual currency.

This announcement drew no objection from the cryptocurrency community. That’s because it makes sense that OFAC would sanction Blender since it is a company or some like entity. That is, Blender is a person or group of persons (whether legally incorporated or not) that provides Bitcoin mixing services. Executive Order 13694, under whose authority the designation was made, defines “persons” subject to listing as “an individual or entity,” and it defines “entity” as “a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization,” and Blender certainly qualifies. When you send funds to an address provided by Blender, the persons who run Blender take control of those coins. They then mix your coins with those of other customers and send an equivalent amount back to you minus a fee.

What’s important to note here is that this entity is ultimately under the control of natural persons, whether they are identified or not. That is, there are human beings with agency who control what Blender the entity does. They can decide to continue to pursue the business or not, or change how they do business. When they receive coins, they can decide to send back mixed coins or not. They can choose to serve some customers and not others, etc.

This also means that when Blender is added to the SDN list, the individuals who run the mixer—who indeed are the Blender entity—can file a petition for removal from the SDN list. As OFAC notes on its petition web page,

The power and integrity of the Office of Foreign Assets Control (OFAC) sanctions derive not only from its ability to designate and add persons to the Specially Designated Nationals and Blocked Persons List (SDN List), but also from its willingness to remove persons from the SDN List consistent with the law.

Blender, because it is an entity that is ultimately under the control of certain individuals, has the ability to bring to OFAC’s attention any number of facts or arguments that could cause the agency to remove it from the list, such as:

It is actually a U.S. person and therefore not properly the subject of sanctions without due process It has changed its behavior and no longer engages in the sanctioned activity The designation was made in error for some reason The designation exceeds Treasury’s statutory or constitutional authority for some reason

And if OFAC denies or does not respond to the petition, Blender can hire lawyers to represent it and challenge the designation in court. The bottom line is that Blender is a legal person, and these are all things a person can do.

With all that in mind, we can now consider Tornado Cash. The press release announcing its addition to the SDN List uses essentially identical language to that employed for Blender:

WASHINGTON – 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 2019.1

In this case, however, the statement does not make sense, is unexpected, and the crypto community has been outraged by the designation. The reason is that Tornado Cash is not equivalent to Blender the way the press release implies because, unlike Blender, it can’t be said that Tornado Cash is a person subject to sanctions. Let’s unpack this.

When OFAC sanctioned Blender, the designation notice (which lists exactly who and what is being added to the SDN List) listed first the entity name, second it listed several web addresses for Blender, and last it listed several dozen Bitcoin addresses. It’s important to understand that the listed Bitcoin addresses were under the control of the persons running Blender, just as the listed web addresses were under their control. You can think of the web and Bitcoin addresses as either pseudonyms for the Blender entity, or alternatively as the property of Blender. In either case, there is a direct relationship of identity or control between the listed addresses and the sanctioned entity (and ultimately the natural persons behind that entity).

The Tornado Cash designation notice also mirrors the Blender notice, again implying that there’s no difference between the two. It first lists the entity (“TORNADO CASH (a.k.a. TORNADO CASH CLASSIC; a.k.a. TORNADO CASH NOVA)”), second it lists “Website tornado.cash”, and finally it lists several dozen Ethereum addresses.

It may be the case that there is an entity that is a “a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization” called Tornado Cash that is under the control of natural persons and that can properly be the subject of sanctions. It may be the entity that owned and operated the tornado.cash website, and it may be the entity that raised funds for the development of the mixer software. Funds raised via Gitcoin were sent to an Ethereum address under the control of the entity that is among those listed in the designation notice. So there is potentially an entity called Tornado Cash that is controlled by certain individuals, and the web address and some of the Ethereum addresses in the notice can be thought of as either pseudonyms for that entity or, alternatively, as its property. At this point, we’re not offering an opinion on whether it was appropriate to sanction that entity—we do not know all the facts that have led to this action—but we would agree that there may be an entity behind those donation addresses and that said entity may be legally eligible for listing. If those people have done nothing beyond author mixing software now found on the Ethereum blockchain then they may have a strong First Amendment defense; we just don’t know all the facts yet.

That said, there are several Ethereum addresses listed that cannot be said to be either pseudonyms for, or the property of, the Tornado Cash entity. These are Ethereum addresses for the mixer smart contract.2 They are the addresses at which a user can find the software logic that, given the proper inputs, will execute and mix coins for users. This is the mixer itself, but it is something wholly separate from the entity identified as Tornado Cash, even though the name “Tornado Cash” is also often used to refer to it. For the sake of clarity, we’ll call them the Tornado Cash Entity and the Tornado Cash Application.

This is sometimes difficult for persons unfamiliar with decentralized blockchain technology to understand, but an application (also known as a smart contract) can be installed on the Ethereum network in such a way that, once installed, the person who installed it no longer has any control whatsoever over it. After that point it will automatically execute when called on by any user in the world giving it the appropriate inputs. In the case of the Tornado Cash Application, anyone in the world can send ETH to it directly and it will mix coins according to the instructions of its code. It will continue to operate as long as the Ethereum network continues to operate.

The Tornado Cash Entity, 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.3 In the case of Blender, the entity and the application are one and the same, but in the case of Tornado Cash they are two completely distinct things. This is the subtle but important difference that OFAC is not recognizing by treating both as one and the same (like in Blender) and adding both to the SDN List as one.

What we are saying here should not be controversial. Indeed, other divisions of the Treasury Department explicitly recognize such a distinction.

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. Regarding service providers, FinCEN explains:

[A] person (acting by itself, through employees or agents, or by using mechanical or software agencies) who provides anonymizing services by accepting value from a customer and transmitting the same or another type of value to the recipient, in a way designed to mask the identity of the transmittor, is a money transmitter under FinCEN regulations.

The guidance goes on to explain that, in contrast to an anonymizing service provider,

An anonymizing software provider is not a money transmitter. … This is because suppliers of tools (communications, hardware, or software) that may be utilized in money transmission, like anonymizing software, are engaged in trade and not money transmission.

FinCEN also distinguishes between (on the one hand) service providers who employ anonymizing software to serve customers and who are thus subject to BSA obligations, and (on the other hand) individual persons who employ anonymizing software on their own behalf. They call this latter category of persons “users”.4

We recognize that OFAC is not bound by FinCEN’s regulations or interpretations. Nevertheless, the fact is that another division of the Treasury Department, and one that is similarly tasked with money laundering and national security concerns, has developed a sensible definition of “mixer” that recognizes that there exists both (1) mixers that are persons and (2) mixers that are not persons but merely software, and further that individual “users” can employ mixer software by themselves and on their own behalf without the participation of any third party. FinCEN’s guidance goes to show that what we are suggesting here is not novel or strange.

With this nuanced distinction between persons and software in mind, the uproar from the cryptocurrency community should now make eminent sense. How can it be proper to add to the sanctions list not a person, or a person’s property, but instead an automated protocol not under anyone’s control? On its petition for removal web page and elsewhere, OFAC states:

The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. Each year, OFAC removes hundreds of individuals and entities from the SDN List. Each removal is based on a thorough review by OFAC.

If the purpose of sanctions is not to punish, but to change behavior, then it makes no sense to add to the SDN List an immutable smart contract that cannot change its behavior because it has no agency. It is not a person nor is it under the control of any person. By conflating the Tornado Cash Entity and the Tornado Cash Application and adding both to the SDN List, the government has essentially accomplished a ban on Americans using a particular internet tool without any clear prospect that the restriction will ever be lifted.

The Tornado Cash Entity, because it is a person, can file a petition to be removed from the list, and it can hire lawyers and sue in federal court if it believes its rights have been violated. The Tornado Cash Application cannot because it is not a person. And because the regulations that govern delisting only provide for persons to petition for themselves or their property, third parties cannot petition for it. The fact that OFAC included the Entity and the Application in the same update notice does not change the fact that they are different things.

This distinction between the Tornado Cash Entity, which is a person and can be properly the subject of sanctions, and the Tornado Cash Application, which is neither a person nor the property of a person, is important not just because it shows that what OFAC did in this case is contrary to its own stated goal of bringing about change in behavior, but because it has implications for OFAC’s statutory authority to do what it has done, as well as the Constitutionality of its actions.

OFAC’s Designation of Certain Autonomous Contract Addresses Exceeds its Statutory Authority Under IEEPA

OFAC derives its authority from a law passed by Congress: the International Emergency Economic Powers Act (50 U.S.C. § 1701 et seq.) (IEEPA). A related authority, the National Emergencies Act (50 U.S.C. § 1601 et seq.) (NEA) empowers the President to declare national emergencies and then to use his IEEPA powers to “block”5 any “transactions involving any property in which any foreign country or a national thereof has any interest” by any person subject to the jurisdiction of the United States. The emergency declared under the NEA in this case is “the increasing prevalence and severity of malicious cyber-enabled activities originating from, or directed by persons located, in whole or in substantial part, outside the United States,” as described in the previously mentioned executive order promulgated by President Obama. That order, citing the statutory authority described in IEEPA, is what empowers the Treasury to block “property and interests in property” related to persons engaged in cyberattacks, loosely defined. The power afforded the President by IEEPA is broadly drafted, but it is nonetheless only a power to block property. The thing being blocked must be “property” and it must be property in which some foreign country or national has an interest.

As we described above, the Tornado Cash Entity does not have a property interest in the Tornado Cash Application. It has no legal right to control that Application, and, perhaps more importantly, it has no physical ability to control that application. Moreover, that application is not even “property” in any reasonable sense of the word. The Application is non-proprietary software residing simultaneously on the computers of every person around the world running the Ethereum open source client. It is no more the property of the Tornado Cash Entity than the phillips-head screwdriver in every American’s home toolbox is the property of its inventor, Henry F. Phillips.

If the Tornado Cash Application is not “property in which some foreign country or national has an interest” (50 U.S.C. §1702), then the Tornado Cash Application cannot properly be added to the SDN List or blocked under the specific powers granted by Congress to the President in IEEPA. Someone—more on whom later—should be able to challenge the designation as being made outside the bounds of the statute and therefore invalid.

That is a strong argument based on a textual or “plain meaning” interpretation of the statute. A plain reading of the IEEPA is that only property, i.e. a thing or things belonging to someone, and more specifically only property belonging to foreign nationals or entities, can be blocked. A plain reading could even stretch to include intellectual property like trade secrets or copyrights, and it could stretch to include not just a foriegn national, but any entity, incorporated or informal, that includes at least some foreign nationals. A plain reading of IEEPA, however, cannot stretch to include blocking lines of software code generally (i.e. the arrangement of symbols and characters itself), and certainly not software to which a sanctioned person has no economic rights.6

One could argue that the software is, in fact, the intellectual property of the Tornado Cash Entity and therefore is a legitimate target for blocking under IEEPA. However, this would be a radically different approach to using sanctions than ever before. Sanctions involving intellectual property typically deal with whether proprietary tools can continue to be licensed from sanctioned individuals, or whether one could buy trade secrets from a corporation in an enemy state. In the present case, the sanction is accomplishing something very different; it’s saying Americans can’t even make use of intellectual property in which the authors have no economic interest. For one thing, the software in question has been released under open source licenses so no American has in the past, or will in the future, pay any license to any author (irrespective of whether those authors are sanctioned). Additionally, the copies of the software already reside on the home computers of anyone who connects to the Ethereum network. The appropriate metaphor for this sanction, therefore, is as if an Iranian author has been sanctioned and, therefore, Americans who already own copies of his book must refrain from reading that book. Similarly, we believe OFAC’s designation is also unlawful because it exceeds its authority under the Executive Order given that the associated addresses are not “persons” as defined in that order, for the reasons we explain above.

The above plain interpretation of the statute could invalidate OFAC’s decision to add the Tornado Cash Application-related Ethereum addresses to the SDN List, though it does not necessarily invalidate the addition of the other addresses that presumably remain in the control of an entity and can be said to be its property. Indeed, there is a growing movement within the judiciary to simplify statutory interpretation and deny deference to agency interpretations that conflict with the plain meaning of the text. That aside, this narrow interpretation is made even stronger by virtue of a substantive canon of statutory construction called the Constitutional avoidance canon, wherein courts will generally choose statutory interpretations that are narrow when a broader interpretation raises constitutional concerns. In this case, a broader interpretation that allows ideas or software in the abstract sense to be the subject of a block raises at least two grave constitutional issues. If we or anyone else were to challenge the listing on statutory grounds, we’d need to explain these constitutional arguments in order to bolster a statutory interpretation claim. Additionally, each of these constitutional arguments could constitute separate claims that may invalidate the order. Therefore, we’ll go through them both in depth.

OFAC’s Designation of Certain Autonomous Contract Addresses Denies American’s their Liberty and Property without Proper Procedural Due Process

The Fifth Amendment requires that any deprivation by the federal government of a person’s life, liberty, or property, must allow for notice, the opportunity to be heard, and a decision by a neutral decisionmaker. As we’ve discussed, the addition of the Tornado Cash Application addresses to the SDN List means that Americans can no longer use that tool, even for wholly legitimate reasons related to their personal privacy while online. That is a restriction on the liberty of every American. There are also some Americans who continue to have funds locked in that application contract today because they deposited them before the ban and have not yet withdrawn them. These Americans with locked funds have not (yet) committed any crime by virtue of using Tornado Cash in the past, because sanctions are always forward looking and backward application would be an unconstitutional ex post facto action. These Americans are the only people who have the physical capability to remove funds from that address because they are the only persons who know the cryptographic data demanded by the Tornado Cash application to create a valid withdrawal transaction. Nonetheless, these Americans cannot make that transaction without, ostensibly, violating OFAC sanctions. This, therefore, is a deprivation of property as well as liberty.7

For both these classes of Americans there has been a deprivation, and the constitutional question is whether there was or will be notice, an opportunity for a hearing, and a decision by a neutral decisionmaker. Speaking generally, if those procedural protections are not afforded to the many Americans whose liberty and or property have been curtailed by OFAC’s action, then the action is unconstitutional.

The government may argue that OFAC’s policies do require an internal and confidential showing of facts and a collateral impact assessment in advance of any addition to the sanctions list, and that these internal processes substitute for a public hearing in situations where national security demands discretion. In the present case, however, there is no indication that any such impact assessment was made, and it’s unknown what procedure, if any, was followed. Indeed, the DeFi Education Fund has already filed a FOIA request in order to, hopefully, better understand what processes and safeguards were in place to limit the collateral impact of the listing. Even if some procedure was followed, to our knowledge OFAC did not allow deprived Americans any ability to participate, it did not include opportunities to cross examine witnesses or question the validity of evidence, and it did not culminate in a decision from a neutral decisionmaker (e.g. a judge in an Article III court).

The government may also argue that advance notice and a right to challenge would be inappropriate given the risk that the targets of the sanction would have been alerted and could have taken steps to move their property before sanctions took effect. They could then argue that Americans continue to have recourse that satisfies due process because they can now, after the listing is public, request a general (for all U.S. persons) or specific (for themselves) license to reclaim their property from the sanctioned addresses. The government can even argue that because of the availability of these licenses there is no actual deprivation of liberty or property, merely a temporary hurdle to overcome before property or liberty can be regained. That is a strong argument in the case of prior, more typical OFAC listings, where there is reason to expect a change of behavior in the sanctioned entity (e.g. an international bank with criminal directors can fire those directors and restart operations or even Blender.io), and where only a small number of U.S. persons are affected. Indeed, this has been an at least partially successful defense employed by the government in previous due process challenges of OFAC orders. The Tornado Cash order is not, however, a typical OFAC order.

The Tornado Cash order is unique in that it affects the property of many Americans whose usage of the sanctioned tools was entirely licit. Only a handful of similar cases exist (e.g. where an international bank with some fraction of its accounts held by Americans was added to the List). In such cases significant efforts are typically undertaken by OFAC and the Treasury Department to work with the sanctioned bank to address the AML/CFT risks that lead to the listing so that the entity can eventually be removed from the List and so that licit accounts, including the accounts of U.S. persons, can be unfrozen. These efforts could also include issuing Frequently Asked Questions (FAQs) at the time of a designation to help innocent persons affected by the order understand their options, offering public or private non-enforcement letters, general or specific licenses, and taking other steps to ensure that affected innocent parties can continue to meet financial obligations like mortgage payments during the duration of a freeze.

We do not believe these typical steps were taken or even could be taken in the case of the Tornado Cash Application because there simply is no bank or other entity with whom OFAC can work to achieve these mitigations. The Application smart contracts are not under anyone’s control. They will continue to operate as they have and the only way to remove licit funds from those contract addresses is and will always be for affected Americans to interact directly with those addresses, something they are not allowed to do. Given these facts and distinctions, it is not unlikely that the typical government defense to a due process claim will be insufficient. Unlike past cases where the deprivation is temporary and the limited process undertaken satisfy some reduced constitutional requirements, here the deprivation seems permanent (barring the grant of a general license for U.S. persons to continue using the tool) and the steps typically taken by the government to mitigate collateral harm (working with the sanctioned bank to eliminate the need for sanctions or else free the funds of non-sanctioned Americans) literally cannot be taken if there is no financial institution with which to collaborate on such efforts.

Arguably, if no general license for Americans to use the Application contracts (either for withdrawal of currently locked property or for future privacy purposes) is granted, then that refusal can be challenged on the grounds that the processes afforded were insufficient under the procedural due process requirements of the Constitution.

The standard for due process is more limited in cases involving national security and uses a balancing test described in Mathews v. Eldridge:

Identification of the specific dictates of due process generally requires consideration of three distinct factors: first, the private interest that will be affected by the official action; second, the risk of erroneous deprivation of such interest through the procedures used, and probable value, if any, of additional or substitute procedural safeguards; and, finally, the Government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirements would entail.

Even under this reduced standard we do not believe the government’s action survives constitutional scrutiny. We will need to uncover many facts before we can be sure, but we suspect that in this case the affected private interest is far larger than ever before, the risk of erroneous deprivation is far more grave, the substitute safeguards are not effective, and the government interest is not substantial.

Perhaps more importantly, the statutory matter in question is not an American’s ability to get a license to use the tool, but rather the fact that adding a mere tool to the list (rather than adding an entity or the property of an entity) was outside the legal authority of OFAC under the IEEPA to begin with. Even if a general license was granted in this specific case there would be no legal way to stop OFAC from simply adding new non-property, non-entity designations beyond the Tornado Cash Application to the OFAC list in the future, despite there being questionable statutory grounds for such unprecedented sanctions. OFAC could incautiously add all manner of non-proprietary software tools to the list (e.g. PGP software for email privacy or even the entirety of Bitcoin itself) and then they could create a de facto licensing regime to selectively allow Americans to once again use these tools. This would be a very powerful tool for social control, and it seems divorced from the text and purpose of the underlying statute upon which OFAC’s authority is based. Speaking generally IEEPA allows the President to block U.S. persons from dealing in the property of a foriegn national; it is not a regime for dictating what types of software, books, music, or tools Americans should be able to use (assuming they are otherwise following the law and not enriching a sanctioned person in the process).

Up until this point we’ve mostly discussed how a U.S. person could challenge, on due process grounds, their inability to get a license from OFAC to use the Tornado Cash Application as it is found at the addresses listed in the SDN List. The lack of due process in this action, however, stems less from the avenues that U.S. persons have to get a license in the future, and more from the fact that a license is now required to use software that isn’t the property of a sanctioned person to begin with. Therefore, challenging the licensing process is not the appropriate approach to address the statutory overreach discussed in the previous section. Instead, the due process deficiencies are in the designation process itself and the inability of U.S. persons to challenge that designation.

Here again we can ask if aggrieved Americans actually have procedural due process rights to bring these challenges. In this case, it is clear that, according to OFAC, no procedural due process rights exist. According to OFAC’s guidance and regulations, the only person who is allowed to challenge a designation and have an entity removed from the list is the entity sanctioned, itself. A third party (e.g. an ordinary American who simply wants to use these software tools) has no obvious avenue to challenge the listing of these tools. Indeed, because the thing listed is mere software that is no one’s property, according to OFAC’s guidance no one can challenge the listing. If listings of this type simply have no avenue for challenge, then they cannot be constitutional under the procedural due process requirements of the Fifth Amendment.

We believe, despite the lack of guidance from OFAC on third-party challenges, that an American who has used and/or intends to use the Tornado Cash Application would likely have standing to challenge the listing under the Administrative Procedure Act (APA). Such a plaintiff could ask a court to set aside the listing as contrary to law because it exceeds the scope of OFAC’s statutory authority and its authority under the governing executive orders. The plaintiff could also ask a court to set aside the agency’s action as arbitrary and capricious because it misunderstands the nature of the technology that it regulates and fails to take into account the reliance interests of existing users of the technology. Should OFAC argue that no such challenge is allowed, should they double down on the existing guidance allowing only listed entities to challenge a designation, then the due process argument for ordinary Americans is made all the stronger.

An Overbroad Interpretation of IEEPA Substantially Chills First Amendment Protected Speech

If the SDN List becomes an ever expanding list of specific open source protocols and applications that are “blocked,” then isn’t that a restriction on the publication of speech? The government could argue that the ideas expressed in those specific pieces of software (identified by a list of smart contract addresses) are not being blocked. Merely, the ability of Americans to send messages to those specific contracts, to use that software, is what is being blocked. Restraining conduct (even expressive conduct like marching in a protest) as compared with mere speech (like publishing a book) receives less protection under the First Amendment.

That argument, however, would prove too much. If the intention of the listing was merely to block the ability of Americans to interact with a specific open source application as it exists at a specific contract address on the Ethereum blockchain, then it would not be effective at achieving any legitimate national security goal. The software in that address can be copied and pasted to a new address by anyone in the world; indeed, identical and similar software and tools are already available at other addresses on the Ethereum blockchain. As a result, it’s still trivially easy for persons to continue accessing these tools, including the persons who, ostensibly, are the target of the cybersecurity executive order that describes the activities meant to be curtailed by these sanctions. But, of course, merely blocking one application is not the intent. The intent is to send a message that any example of this software is to be avoided. The intent is to chill speech such that Americans not only avoid interacting with these specific contract addresses, but avoid interacting with any protocol that is substantially similar to the code in those addresses. It’s a ban not just on a specific application, but on a class of technology, and according to the Financial Times, Treasury officials have, in fact, said exactly that:

We do believe that this action will send a really critical message to the private sector about the risks associated with mixers writ large,” the Treasury official said, adding that it was “designed to inhibit Tornado Cash or any sort of reconstituted versions of it to continue to operate.”

American software publishers and communications intermediaries immediately got that message. Several open source software developers who were not named in the sanction designation have had their accounts at GitHub shut down and their published software repositories deleted or made private. These actions already represent a significant curtailment of ongoing research and development in scientific and engineering ideas pursued for the betterment of humanity. While the designation of the Tornado Cash Application did not order the removal of these publications, it nonetheless substantially chilled, and indeed seems to have been intended to chill, the publication of First Amendment-protected speech.

We are not claiming that IEEPA, itself, creates an unconstitutional prior restraint on speech, but rather that its application in this case is explicitly overbroad. While typical OFAC actions merely limit expressive conduct (e.g. donating money to a particular Islamic charity), this action sends a signal—indeed seems to have been intended to send a signal—that a certain class of tools and software should not be used by Americans even for entirely legitimate purposes. Even if this listing is truly and exclusively aimed at stopping North Korean hackers from using Tornado Cash, and even if the chilling effect on the use of the tool by Americans for legitimate reasons was acceptable to OFAC in a collateral impact analysis, it may not be sufficient to a court. As the Supreme Court in Broadrick v. Oklahoma found, sometimes “the possible harm to society in permitting some unprotected speech to go unpunished is outweighed by the possibility that protected speech of others may be muted and perceived grievances left to fester because of the possible inhibitory effects of overly broad statutes.”

What Comes Next

Given all this, what are our next steps?

First, we will seek to engage OFAC, share our views, and hopefully hear theirs. We have also had inquiries from members of Congress about the situation and we will continue to brief interested parties there.

Second, there are innocent Americans who have funds trapped at listed Tornado Cash addresses. We will do our best to help them apply for a license to withdraw those funds. In addition, the DeFi Education Fund has announced that it will be petitioning OFAC to issue a “general license” that would cover all affected persons without each having to file individually and we will support that effort.

Finally, we will begin exploring with counsel a court challenge to this action. Stay tuned.

Notes