What the OFAC Coin Center Lawsuit Means for Crypto Regulation

It has been a turbulent crypto winter. The market value of digital assets has fallen by an estimated $1.1 trillion compared to this time last year, while a continuous series of bankruptcies, price drops and job losses have dealt a serious blow to crypto’s trust and integrity.

In response, crypto regulation has increased across regions, moving from speculation to application. In September, the European Union finalized legislation on crypto-asset markets, while the Financial Stability Oversight Council urged Congress to speed up regulation of the crypto market.

Meanwhile, an important court case unfolds. In response to the Office of Foreign Assets Control’s decision to impose sanctions on crypto mixer Tornado Cash — which claimed North Korean hackers used it to launder hundreds of millions of dollars — the non-profit Coin Center filed a lawsuit against OFAC.

Coin Center claims OFAC’s actions are illegal, saying it lacks the power to sanction decentralized software and that Americans have a right to use privacy tools like Tornado Cash.

The lawsuit has shifted the crypto regulatory debate from government legislation and industry cooperation to potential litigation. What does this mean for crypto regulation going forward and how should the industry react?

Impact on the trial

The Treasury Department’s sanctions against Tornado Cash and Coin Center’s lawsuit represent a broader regulatory debate across the industry. Some in the crypto community vehemently oppose centralized market interference, arguing that it will stifle innovation and contradict crypto’s decentralized premise.

The Coin Center lawsuit strongly reflects this thinking. Tornado Cash is “not a person” under the OFAC statute, but also, Coin Center argues, “it is a privacy tool beyond anyone’s control.”

This suggests that decentralized software process should be free from regulation or government action. If that is true, does decentralization mean that – by definition and design – a product does not fall under the rule of law?

This line of inquiry has serious legal implications. If this is indeed Coin Center’s implication, then it has taken an incredibly bold stance on how decentralized instruments should be used. By this reasoning, any platform that facilitates payments through decentralized technology avoids liability as a licensed payment provider, precisely because the technology is decentralized.

This means, for example, that a decentralized system that acts as a clearing house will be immune from liability if customer funds were stolen or frozen.

Regulation and innovation

However, the argument that Coin Center apparently presents overlooks that ultimately, crypto service providers cannot live outside of regulation forever. When technology takes over the functions that would otherwise fall to persons or entities, its creators and users can no longer claim that it is outside the rule of law.

Politicians will not sit by and let this framework go unregulated even if Coin Center temporarily wins the lawsuit. And this is why regulatory measures are being drafted across jurisdictions and are expected to be implemented in the near future.

The crypto community should not see regulation as a dark cloud hanging over the industry. Regulatory measures – when tailored to the unique characteristics of the crypto market – can provide clear guidelines on how decentralized technology should be used, who can use it and for what purpose.

Regulation can act as a funnel for innovation, where companies can reap the efficiency benefits of a software.

Moreover, if the crypto industry wants to play a role in today’s financial system, it must adapt to the rules of this infrastructure. Many financial institutions recognize the potential of blockchain and distributed ledger technology, but hesitate to integrate this software into their business models due to a lack of legal or regulatory certainty.

The introduction of clear rules could go a long way in helping crypto gain the confidence and trust it needs for firms to offer digital assets as part of their services and integrate DLT into their operational systems.

It remains to be seen how the Coin Center lawsuit will develop. But regulation and innovation are not mutually exclusive. The crypto community should not reject regulation, but instead see it as a bridge to greater adoption of financial institutions and markets. DLT cannot be out of anyone’s control – and that’s a good thing.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Charlie Cooper is CEO of enterprise blockchain firm R3. Previously, he was Chief Operating Officer at the Commodity Futures Trading Commission and began his legal career at Kirkland & Ellis.