US Treasury challenged over Tornado Cash sanctions

In an attempt to overturn sanctions imposed on Tornado Cash, Ethereum’s privacy service, the plaintiffs are questioning the U.S. Department of Treasury’s interpretation of property rights in smart contracts and application of the first amendment’s free speech clause.

Recent legal developments involve lawsuits directed at the U.S. Department of Treasury regarding the sanctions imposed on Tornado Cash, a service that mixes Ethereum. The plaintiffs argue that the lawsuit is primarily focused on ensuring that the Treasury adheres to the fundamental principles of the International Emergency Economic Powers Act (IEEPA) and the Free Speech Clause of the First Amendment rather than creating specific regulations for emerging technologies.

Paul Grewal, the Chief Legal Officer of Coinbase, summarized the arguments on Twitter, highlighting a key issue: the government’s attempt to prohibit open-source software using property sanctions legislation. Legal dispute centers on four main points. First, the plaintiffs challenge Treasury’s claim that any holder of TORN, Tornado Cash’s digital token, automatically becomes part of the “Tornado Cash” entity. Grewal commented on this point, stating that the claim lacked legal and factual credibility.

The second point of contention revolves around the Treasury’s failure to clarify how the immutable, open-source smart contracts referred to in the designation qualify as “property” since they cannot be owned, controlled, or altered.

This leads to the third point of disagreement, as Grewal explained, that the creators, developers, and owners of TORN tokens do not possess a “property interest” in these immutable smart contracts.

The plaintiffs’ filing explains, “In trying to identify such an interest, the Department solely relies on assumptions that the alleged Tornado Cash entity has stakes in something apart from the immutable smart contracts or would potentially profit from increased utilization of the immutable smart contracts. However, neither constitutes an ‘interest’ in property in the immutable smart contracts, as mandated by the IEEPA.”

Tornado Cash, a privacy-focused service on the Ethereum blockchain, offers users anonymity by obscuring individual transactions. However, in 2022, the Treasury’s Office of Foreign Assets Control (OFAC) added the service to its specially designed list of nationals and blocked persons (SDN), imposing sanctions on Ethereum wallets associated with Tornado Cash.

U.S. regulators claim that Tornado Cash has facilitated the laundering of over $7 billion since its launch in 2019, with the alleged involvement of malicious actors, including North Korean hackers. This triggered a swift lawsuit supported by Coinbase, contesting the sanctions imposed on Tornado Cash.

The outcome of this lawsuit may establish a significant precedent, impacting not only the rapidly expanding cryptocurrency industry but also future government regulations in the realm of digital technology.

source