Crypto investors backed by Coinbase are suing the US Treasury over Tornado Cash sanctions

by · September 8, 2022

According to a new lawsuit filed in the US District Court, Western District of Texas. On Thursday, six users of the Ethereum blockchain and cryptocurrency mixer Tornado Cash sued the US Treasury Department, alleging that the recent designation of 44 Tornado Cash smart contracts addresses the Specially Designated Nationals (SDN) list of the Office of Foreign Asset Control ( OFAC ) is “not in accordance with law.”

Since August 8, US persons and entities have been prohibited from interacting with the sanctioned Tornado Cash smart contract addresses, blockchain or business-wise, under the threat of criminal or civil penalties for non-compliance. The plaintiffs seek to annul the designation based on three arguments. First, they argue that Tornado Cash does not meet the definition of an estate, a foreign country or a citizen thereof, nor a person and therefore cannot be added to the SDN list.

Second, they claim a violation of their First Amendment (free speech) rights under the US Constitution:

“Tornado Cash allows claimants to participate in important, socially valuable speeches. However, due to the designation, claimants cannot use Tornado Cash to make donations to support important, and potentially controversial, political and social causes.”

Third, the plaintiffs say that because of the treasury designation, they could not access Ether stored in Tornado Cash pools. They argued that such alleged lack of proper pre-deprivation process was contrary to legal procedures.

Later that day, cryptocurrency exchange Coinbase publicly supported the lawsuit. The firm hailed the move as “defending privacy in crypto,” and pledged to fund the lawsuit. “The sanctions exceed the Treasury Department’s authority, harm innocent people, remove privacy and security options for crypto users, and stifle innovation,” Coinbase said. It then listed individual examples of claimed benefits of Tornado Cash:

“A person used Tornado Cash to donate money to Ukraine anonymously. Afterwards, his wallet received potentially malicious airdrops. But because he anonymized his cryptographer before donating, he avoided attacks on his personal accounts. He has funds trapped in Tornado Cash.”

“Developers are concerned that they could be held responsible for something they had nothing to do with and no ability to control,” Coinbase said in an argument that claims the Treasury’s move will stifle innovation. The US Treasury Department claims that over $7 billion worth of crypto has been laundered via Tornado Cash since its inception. Stablecoin issuers, such as Circle, have taken steps to freeze blacklisted Tornado Cash smart contract addresses due to the ban. Others, like Tether, have refrained from such a move until they receive instructions from law enforcement.