Crypto investors backed by Coinbase sue U.S. Department of Treasury after Tornado Cash sanctions

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

Since August 8, U.S. 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 Tornado Cash does not meet the definition of a property, a foreign country, or a national thereof, nor a person and therefore cannot be added to the SDN list.

Second, they claim a violation of their First Amendment (freedom of speech) rights under the U.S. Constitution:

"Tornado Cash allows Plaintiffs to engage in important, socially valuable speech. However, due to the designation, plaintiffs cannot use Tornado Cash to make donations to support important, and potentially controversial, political and social causes."

Thirdly, the plaintiffs say that because of the Treasury designation, they could not access the Ether stored in Tornado Cash pools. They argued that such alleged lack of proper pre-deprivation process was in-violating 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 Treasury’s authority, harm innocent people, remove privacy and security options for crypto users, and stifle innovation," said Coinbase. It then raised individual examples of purported benefits of Tornado Cash:

"One person used Tornado Cash to donate money to Ukraine anonymously. Afterward, his wallet received potentially malicious airdrops. But because he anonymized his crypto before donating, he avoided attacks against his personal accounts. He has funds trapped in Tornado Cash."

"Developers are worried that they could be held responsible for something they had nothing to do with and no ability to control," said Coinbase in an argument claiming the Treasury's move will stifle innovation. The U.S. Department of Treasury 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, such as Tether, have refrained from such a move until they receive instructions from law enforcement. 

1/7This morning, Brian Armstrong shared why Coinbase is funding and supporting a challenge by six individuals (including two CB employees) against the Treasury Department and OFAC’s novel sanctions of open source software associated with Tornado Cash. https://t.co/8l5iKAjVZg

— paulgrewal.eth (@iampaulgrewal) September 8, 2022