The Tornado Cash Lawsuit Against U.S. Treasury: Explained
On September 8, a lawsuit was brought by six Ethereum and Tornado Cash users to challenge the U.S. Treasury’s sanction of the Tornado Cash smart contracts. The plaintiffs in this case are asking that the court remove these smart contracts off the U.S. sanctions list, arguing that the sanctions exceed the Treasury’s authority, harm innovation, and is a violation of the first amendment.
Shortly after the case was filed, Coinbase announced they will fund this lawsuit because they “believe this action harms innocent people and threatens the future of decentralized finance (DeFi) and web3 specifically.”
The Lawsuit
According to the complaint, the six plaintiffs are users of the Ethereum blockchain and the privacy protocol known as Tornado Cash. They plaintiffs make three critical arguments on the sanctioning of Tornado Cash:
- It exceeds the Treasury’s statutory authority;
- It infringes on the plaintiffs’ constitutional rights; and
- It threatens the ability of law-abiding Americans to engage freely and privately in financial transactions
It exceeds the Treasury’s statutory authority
On August 8, the U.S. Treasury added Tornado Cash, 37 of its smart contracts, and an address used to accept donations to develop Tornado Cash projects to the Specially Designated Nationals and Blocked Persons (SDN) List.
Tornado Cash is not a person, entity, or organization. It is a decentralized, open-source project that protects the privacy concerns of its users through specialized smart contracts. When an individual user interacts with a smart contract, the code automatically executes when a set of preconditions are met, without any human intervention. Tornado Cash smart contracts are immutable.
According to law, the President has delegated certain sanctions authority to the U.S. Treasury limited to, “any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States.”
Tornado Cash, and its smart contracts, consist of immutable open-source software, which is not property, a foreign country, a national, or a person of any kind.
It infringes on the plaintiffs’ constitutional rights
The Office of Foreign Assets Control’s (OFAC) designation of Tornado Cash is unconstitutional under the Free Speech Clause of the First Amendment and the Due Process Clause of the Fifth Amendment to the U.S. Constitution.
By providing a certain degree of privacy, Tornado Cash allows the plaintiffs to engage in socially valuable methods of speech. The designation of Tornado Cash prohibits users from making donations to support important, and likely controversial, political and social causes. It also prohibits users to facilitate the improvement of Tornado Cash, and the larger Ethereum network. Plaintiffs are also unable to develop future business ventures with Tornado Cash, which themselves may engage in socially valuable forms of speech.
The plaintiffs in this action are currently unable to retrieve the Ether that belongs to them because it is trapped in Tornado Cash. That ETH is their property. The plaintiffs did not receive any process prior to the deprivation of their property, in violation of due process.
It threatens the ability of law-abiding Americans to engage freely and privately in financial transactions
None of the plaintiffs in this action are criminals or terrorists. None have a history of supporting terrorism or laundering money. They are business owners, employees, and citizens seeking to keep their business transactions and political donations private.
This sanction prohibits any U.S. citizen from doing business or engaging financially with Tornado Cash. That includes providing funds, goods, or services to a designated entity. As a result, no Ethereum user subject to U.S. jurisdiction can lawfully use Tornado Cash for any purpose without fear of serious government enforcement. Other law-abiding citizens are prohibited from depositing, withdrawing, sending, or receiving funds from Tornado Cash — even when the funds have no connection to illicit activity.
Furthermore, because Tornado Cash is open-source and self-executing, it is still operational. Because no intermediary is necessary, U.S. persons with an Ethereum address can still receive unsolicited cryptocurrency assets sent through Tornado Cash, in violation of sanctions. Essentially, someone can send crypto, through Tornado Cash, to any Ethereum wallet holder, without their consent, and place the receiver of that cryptocurrency in violation of U.S. sanctions.
This forces Ethereum users to transact without the privacy benefits provided by Tornado Cash and forego the opportunity to engage in potentially valuable personal and business transactions.
Coinbase Bankrolls the Lawsuit
“Sanctioning open source software is like permanently shutting down a highway because robbers use it to flee a crime scene,” said Coinbase CEO Brian Armstrong. In his announcement that Coinbase would sponsor the lawsuit against the U.S. Treasury, Armstrong makes a critical fourth argument outside the court complaint: these sanctions stifle innovation.
Armstrong makes a good point. Sanctioning open-source code will spook developers worried that they could be held responsible for something they had very little to do with, and can no longer control. He argues that developers of software that moves the industry forward may simultaneously put themselves at risk by doing so. In a burgeoning industry with so much potential, innovation should be encouraged not impeded by fear and uncertainty.
Following the sanction of Tornado Cash, crypto organizations like Coin Center, but also digital libertarian groups like the Electronic Frontier Foundation, have made strong arguments against the sanctions, stating they threaten basic American principles of freedom.
Many are praising Coinbase for backing the lawsuit, incurring regulators’ wrath by challenging the Treasury. But this isn’t the first time they’ve done so. In 2017, Armstrong took on the IRS when the tax agency overreached by requesting “John Doe” summons for all Coinbase Users.
“It’s important that the law’s distinction between people and code be respected,” said Paul Grewal, Coinbase’s chief legal officer. “If that disrespect is allowed to stand, there could be all sorts of other ways in which statutes are twisted and bent to apply to crypto in ways that they shouldn’t be.”
Two of the plaintiffs in this case are Coinbase employees. Grewal said that the company has a “unique responsibility to support that cause, given our role in the crypto ecosystem.” According to Grewal, Coinbase identified the plaintiffs by surveying its own workforce and people they knew to see how the Tornado Cash sanctions have affected users.
“We came to understand that we had employees inside of Coinbase who were relying upon Tornado Cash to do things like donate money to relief efforts in Ukraine and to protect their transactions and salary information from prying eyes,” he said. “Ordinary people doing ordinary things suddenly swept up in designations that had no basis in law.”
About Centuries Analytics
Investing in cryptocurrency doesn’t have to be risky — not anymore. We let data speak; not investors, “experts”, pundits, or tv show commentators. Centuries uses social media, financial, and macro-economic data to determine and predict cryptocurrency markets.
Find out more: https://www.centuriesanalytics.com/
