Crypto exchange Coinbase is throwing its support behind plaintiffs seeking to remove sanctions imposed by the United States government on Tornado Cash, a privacy-focused cryptocurrency mixer.
Six U.S. citizens, Joseph Van Loon, Tyler Al-meida, Alexander Fisher, Preston Van Loon, Kevin Vitale, and Nate Welch, have filed a lawsuit against the United States Office of Foreign Assets Control (OFAC), Secretary of the Treasury Janet Yellen, and OFAC Director Andrea Gacki.
The plaintiffs are seeking to remove the ban on Tornado Cash, arguing that the sanctions are unlawful and violate the Administrative Procedure Act (APA).
OFAC added Tornado Cash to the Specially Designated Nationals And Blocked Persons List (SDN) List in August 2022. This list contains individuals and entities subject to economic sanctions that prohibit US citizens or businesses from doing business with them.
Tornado Cash is a cryptocurrency mixer that enables users to enhance the privacy of their transactions on Ethereum, a smart contracting platform.
The lawsuit claims that the government cannot impose sanctions on Tornado Cash because it is not a foreign national or person but rather just software. The plaintiffs contend that the software’s smart contracts at its core cannot be controlled or owned by anyone. Therefore, the sanctions on Tornado Cash violate the First Amendment.
Coinbase has backed the plaintiffs, arguing that the government’s actions could set a precedent for future cryptocurrency regulation. If OFAC can impose sanctions on open-source software code, it could prohibit intangible concepts that cannot be classified as property, hindering the development of the entire cryptocurrency industry.
Legal Implications on crypto regulation
Tornado Cash’s use of privacy protocols is increasingly important for individuals who want to protect their online privacy. While the Ethereum blockchain allows users to transfer funds between digital wallets instantly and without the need for a trusted third party, the public blockchain makes it possible for anyone to monitor the financial dealings of any other user.
Tornado Cash’s use of open-source and autonomous smart contracts to power a token mixer provides increased privacy, making it difficult to associate spending from one wallet with its owner. However, some hackers have exploited this feature, with some associated with the Lazarus Group cell in North Korea.
The outcome of this legal challenge may have far-reaching effects on how cryptocurrencies are regulated in the United States. If the plaintiffs prevail in court, it may pave the way for more privacy-protective policies and regulations surrounding cryptocurrency transactions.
If the court rules in favor of the sanctions, however, it could set a precedent for government regulation and restriction of privacy protocols.