Updated Oct 12, 2022 - Economy & Business

Coin Center suit alleges Tornado Cash sanction exceeded statute

Illustration of Lady Justice's scales weighing a tornado.

Illustration: Shoshana Gordon/Axios

Coin Center filed suit against the U.S. Treasury on Wednesday alleging that it has exceeded its authority in sanctioning the Ethereum-based privacy app, Tornado Cash.

Why it matters: Treasury's Office of Foreign Asset Control set up a legal quandary when it treated Tornado Cash, which is an autonomous smart contract that runs itself on the Ethereum blockchain, like a person or organization. Coin Center's suit will test the U.S. government's reasoning.

Catch up fast: Treasury added Tornado Cash to its list of sanctioned entities in August, making it illegal for any U.S. citizen or anyone in its territories to use the application in any way.

  • $482 million worth of crypto was sitting in the Tornado Cash smart contracts at the time, but that's now down to $166 million according to DefiLlama.
  • In September, Treasury provided guidance for how users could lawfully withdraw funds.
  • The publicly traded crypto exchange Coinbase has sponsored a similar suit by six users, brought in the Western District Court of Texas.

Context: Coin Center is one of the longest-standing non-governmental organizations representing the blockchain industry and it has been long expected it would take this matter up directly.

The basics: The parties to the complaint are Patrick O'Sullivan, a user; David Hoffman, a prominent crypto commentator from Bankless who was involuntarily implicated by the sanctions and an anonymous person who used TornadoCash to make private donations to causes.

  • The suit names Treasury Secretary Janet Yellen and was filed in the Northern District of Florida.
  • Law firms Consovoy McCarthy and Abraham Sutherland are representing Coin Center and the plaintiffs in the case.

Details: Coin Center makes a few arguments. Broadly, it notes that Ethereum by its very nature is not private, like the traditional financial system.

  • The suit alleges that Treasury's action exceeded its authority under both laws and regulations.
  • It also said that Treasury failed to consider the impact on regular people who were using Tornado Cash either as an investment or in much the same way people use encrypted email.
  • Finally, it said that sanctions have a chilling effect on Americans' willingness to associate with each other via transactions since it makes it difficult for those whose wealth is on Ethereum to transact privately.

In the weeds: Hoffman's case is worth explaining. He has a known Ethereum address. An unknown user sent very small amounts of ETH (a "dusting") to a bunch of known wallets of celebrities and prominent users.

  • Ethereum (like bitcoin) is push only. There's no way to reject a transaction, and because the perpetrator of the dusting used Tornado Cash, there's no way to know who to send the ETH back.
  • Technically, this could implicate those wallet owners, under the sanctions, though there's no known example of OFAC pursuing such a case.

What we're watching: Whether or not the complaint proceeds to trial.

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