Storm of Regulatory Overreach: Challenging Sanctions on Crypto Mixing Services

Cryptocurrency transactions are often anonymous, but not private, as they are publicly accessible on most blockchains. This transparency has made it easier for law enforcement to track stolen and laundered cryptocurrency, but also for criminal actors to identify crypto users. In response, crypto-mixing services have emerged to act as intermediaries, mixing transactions to make them harder to track. Tornado Cash, a popular mixing service, uses smart contracts to achieve this. However, the Treasury Department's Office of Foreign Assets Control (OFAC) has imposed sanctions on Tornado Cash, prohibiting US persons from engaging with it. The question arises: does OFAC have the authority to do so, particularly with smart-contract-based services? Two lawsuits are challenging OFAC's decision, arguing that it involves an unprecedented exercise of authority. The cases center around statutory interpretation, specifically the meaning of 'person,' 'property,' and 'interest in property.' The plaintiffs argue that OFAC exceeded its authority, as Tornado Cash operates through open-source, immutable smart contracts that cannot be owned. The cases raise concerns about due process, First Amendment rights, and the role of administrative agencies in regulating new technologies. Ultimately, the lawsuits highlight the need for Congress to address the changing landscape of cryptocurrency regulation, rather than relying on agencies to stretch existing laws beyond their intended scope.