A high-stakes legal matter is brewing in a U.S. court in Austin, Texas, as a group of crypto engineers and investors bring forth a lawsuit in response to the sanctions placed on the Tornado Cash protocol. Key inquiries revolve around the nature of smart contracts, protocol token holders, and open-source software, posing thought-provoking questions about property, unincorporated associations, and free speech.
The lawsuit alleges that the U.S. Department of Treasury sanctions against Tornado Cash’s privacy protocol violate the International Emergency Economic Powers Act (IEEPA) on multiple fronts. One argument contests that the Department has not correctly identified a foreign “national” and “property” linked to Tornado Cash, and has inadequately demonstrated sanctionable interest in the protocol’s immutable, open-source smart contracts. The plaintiffs argue that the Department failed to establish that these immutable smart contracts can be owned.
Another point of contention is the Treasury’s classification of Tornado Cash as an unincorporated association. The plaintiffs disagree with this designation, stating that there is no evidence that token holders have combined to execute the supposed “common purpose” of operating, promoting, or updating the Tornado Cash privacy protocol.
The defendants also argue that if the Treasury’s sanctions are authorized, it would infringe on First Amendment rights due to their broad nature. They claim that this action violates the free speech clause, as it prohibits plaintiffs and other law-abiding American citizens from engaging with open-source code to partake in various speech protected under the First Amendment.
Tornado Cash is often utilized by hackers to obscure gains from illicit activities, such as the Crypto.com and Transit Finance hacks. However, law enforcement experts have warned that this does not necessarily make the protocol complicit in money laundering. The plaintiffs argue that the evidence against Tornado Cash is “weak,” citing that only three instances of money laundering have been detected from millions of transactions.
In the Netherlands, Tornado Cash developer Alexey Pertsev faces trial over money laundering allegations. In a recent development, Pertsev has won the right to cross-examine blockchain analytics company Chainalysis, a prominent source of on-chain evidence in court cases.
As the legal discussions surrounding Tornado Cash escalate, it highlights the complex regulatory landscape surrounding decentralized privacy protocols and explores the boundaries of property ownership, associations, and free speech in the context of blockchain technology.