Sep 8, 2022 - Economy

Coinbase employees, Ethereum supporters sue U.S. Treasury

The Tornado Cash website displayed on a laptop.

Photo: Luke MacGregor/Bloomberg via Getty Images

Coinbase employees and long-term Ethereum supporters are suing the U.S. Treasury over its decision last month to sanction the crypto service Tornado Cash, Fortune reports.

Why it matters: The case could have an impact across the cryptocurrency industry for the foreseeable future as it will likely determine if the U.S. government can impose sanctions on crypto services.

Driving the news: Six cryptocurrency supporters filed the lawsuit against the treasury at a federal court in Texas Thursday, CNBC reports.

  • The plaintiffs allege that the U.S. government overreached by imposing sanctions on Tornado Cash, saying it violated their free speech and property rights.
  • The users claim in the suit that the decision “threatens the ability of law-abiding Americans to engage freely and privately in financial transactions.”
  • Preston Van Loon, a prominent member of the Ethereum community, as well as Tyler Almeida, who works as a California security analyst at Coinbase, are among those listed as plaintiffs in the suit.
  • Coinbase will pay the costs of the lawsuit.

What they're saying: "Sanctioning open source software is like permanently shutting down a highway because robbers used it to flee a crime scene," Brian Armstrong, CEO and co-founder of Coinbase, said in a statement. "It’s not the best way to solve a problem. It ends up punishing people who did nothing wrong and results in people having less privacy and security."

  • Almeida said that the sanctions keep him from donating and expressing himself under First Amendment rights, per Fortune.

Of note: Tornado Cash is autonomous code that runs on the Ethereum blockchain. It doesn't require human involvement to operate.

  • The plaintiffs' case seems to hinge on whether or not such code can be found to be "individuals or entities" under the relevant law.

Context: The Treasury Department argued that Tornado Cash was used for $7 billion in money laundering by North Korean hackers, among others, per CNBC.

  • "Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks," Treasury undersecretary Brian Nelson said in a statement.
  • The department did not immediately respond to Axios' request for comment.

Flashback: The Office of Foreign Asset Control added Tornado Cash to its list of sanctioned internet services back in August, Axios' Brady Dale reports.

  • The service is often used by cyber criminals.
  • Any American who uses the service could be in violation of the law and authorities might visit them.
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