In an ongoing legal battle between individuals seeking to overturn the decision to sanction Ethereum mixing service Tornado Cash and the US Department of Treasury, new key arguments have been presented. The case’s core points revolve around maintaining the Treasury’s adherence to basic requirements under the International Emergency Economic Powers Act (IEEPA) and the Free Speech Clause of the First Amendment to the United States Constitution.
Coinbase‘s chief legal officer, Paul Grewal, posted on Twitter that the government is trying to ban open-source software using a property sanctions statute. He argues that the law was not meant for this purpose, leading to challenges fitting the case within these legal confines.
Tornado Cash is a privacy-focused service that enables anonymous transactions on the Ethereum blockchain by pooling users’ transactions, thereby obscuring individual senders and receivers. The Department of the Treasury’s Office of Foreign Assets Control (OFAC) added Tornado Cash to its Specially Designated Nationals and Blocked Persons (SDC) list in August 2022, which sanctioned Ethereum wallets linked to the service.
The US government claims that Tornado Cash has facilitated the laundering of over $7 billion since 2019, involving North Korean hackers and other malicious actors. In response, a lawsuit backed by Coinbase has been filed against the Treasury, contesting the sanctions imposed on Tornado Cash based on four main points.
The first point involves the Treasury’s definition of “Tornado Cash,” which includes anyone who holds a digital token (TORN). However, the plaintiffs argue that it fails to meet the Department’s requirement of being an unincorporated association. The second challenge is centered around the Department’s failure to explain how the immutable, open-source smart contracts listed on the designation can be considered sanctionable “property.” As Grewal explains, smart contracts cannot be owned, controlled, or changed by anyone.
Thirdly, the plaintiffs state that no property interest can be found in the smart contracts for the creators, developers, or TORN token holders. According to the filing, the Department relies on allegations that the supposed Tornado Cash entity has interests beyond the smart contracts or profits from increased use of these contracts, which is not considered a property interest under the IEEPA.
Lastly, the plaintiffs argue that sanctioning Tornado Cash violates the First Amendment’s protection of free speech. Grewal claims that the government’s response is “worrisome” and that the First Amendment should not allow the government to redirect law-abiding Americans to exercise their freedom elsewhere.
This legal challenge comes as a Dutch court grants the creator of Tornado Cash, Alexey Pertsev, permission to question blockchain analytics company Chainalysis in his money laundering trial. Chainalysis’ report revealed that 34% of all funds sent to Tornado Cash originated from illicit sources. Pertsev’s lawyers now aim to interrogate the firm due to the role its data played in his arrest in August of last year.