The U.S. Department of Treasury is currently facing a lawsuit over its sanctions against Tornado Cash, a privacy service on the Ethereum blockchain. The plaintiffs in the case are challenging the Treasury’s interpretation of property rights in smart contracts and the application of the First Amendment’s free speech clause.
Tornado Cash, a service that provides anonymity to its users by obscuring individual transactions, was added to the Treasury’s Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked Persons (SDC) list in 2022. This move effectively sanctioned Ethereum wallets associated with Tornado Cash. The U.S. regulators claim that Tornado Cash has facilitated the laundering of over $7 billion since its inception in 2019, with alleged beneficiaries including North Korean hackers. This led to a swift lawsuit, backed by Coinbase, challenging the sanctions.
The lawsuit focuses on four main points. Firstly, the plaintiffs dispute the Treasury’s claim that any holder of TORN, Tornado Cash’s digital token, is automatically considered part of the “Tornado Cash” entity. Paul Grewal, Coinbase’s Chief Legal Officer, stated on Twitter that this claim lacks both legal and factual credibility.
Secondly, the plaintiffs question the Treasury’s failure to clarify how the immutable, open-source smart contracts mentioned in the designation qualify as “property,” given that they cannot be owned, controlled, or altered. This leads to the third point of contention, that neither the creators, developers, nor owners of TORN tokens hold a “property interest” in these immutable smart contracts.
The plaintiffs’ filing explains, “In trying to identify such an interest, the Department solely relies on assumptions that the alleged Tornado Cash entity has stakes in something apart from the immutable smart contracts or would potentially profit from increased utilization of the immutable smart contracts. However, neither constitutes an ‘interest’ in property in the immutable smart contracts, as mandated by the IEEPA.”
The outcome of this lawsuit could set a significant precedent, with implications not only for the rapidly growing cryptocurrency industry but also for future government regulation in the sphere of digital technology.
In a series of tweets, Paul Grewal further elaborated on the arguments presented in the lawsuit. He emphasized that the government’s attempt to ban the use of open-source software using property sanctions legislation is not what the law was intended for. He also highlighted that the plaintiffs are not asking for special rules for crypto, but rather that the government meet the basic legal requirements that Congress wrote before banning access to a privacy tool that protects legal purchases and donations.