Crypto Engineers, Investors Sue US Treasury Over Tornado Cash Sanctions
Six crypto users are suing the US Treasury Department to blacklist Tornado Cash last month, claiming the department’s sanctions watchdog overstepped its authority in banning all US persons from interacting with the privacy tool.
According to the lawsuit filed in the US District Court for the Western District of Texas, the Treasury Department’s Office of Foreign Assets Control (OFAC) did not have the legal right to designate Tornado Cash, which the lawsuit refers to as “a decentralized, open-source software project that restores some privacy for Ethereum users,” as a sanctioned entity because it is not an entity, person or organization.
OFAC added Tornado Cash’s wallet addresses, including smart wallet addresses, to its Specially Designated Nationals (SDN) list last month, saying the privacy mixer was a key tool for North Korean hackers, who used it to launder crypto stolen from projects like Axie Infinity. The SDN list consists of blacklisted individuals or companies owned by, or acting on behalf of, countries that OFAC has targeted.
The plaintiffs are Coinbase employees Tyler Almeida and Nate Welch, Prysmatic Labs co-founder Preston Van Loon, GridPlus engineer Kevin Vitale, Ethereum proponent and angel investor Alexander Fisher and former Amazon engineer Joseph Van Loon (whose current employer was not disclosed). Crypto exchange Coinbase is funding the effort.
Each of the plaintiffs has some ether (ETH) locked up in Tornado Cash, which they used for various legal purposes – including donations to Ukraine and protecting their private wallets from being traced to their public online identities – but can no longer access due to OFAC’s sanctions, the lawsuit alleges.
Alongside the Treasury Department, the plaintiffs are Treasury Secretary Janet Yellen and OFAC Director Andrea Gacki.
The plaintiffs allege that OFAC violated the Administrative Procedure Act, which dictates how federal agencies must develop and issue regulations, because Tornado Cash is not property or a foreign national/country, and therefore the sanctions watchdog exceeded its authority.
The filing also alleges a violation of the plaintiffs’ First Amendment right to “engage in important, socially valuable speech.”
Preston Van Loon, Almeida, and Welch also allege a violation of their Fifth Amendment rights, which protect against self-incrimination, because they did not receive a notice or any other form of prior process before their ETH was frozen.
As a result, the plaintiffs are asking the court to “declare[e] that the defendant’s designation is invalid, and without force and effect; declare[e] that the defendant’s designation is not in accordance with the law; … available[e] the designation; permanently enjoining the defendants and their officers, employees and agents from enforcing, implementing, applying or taking any action whatsoever under, or in reliance on, the designation” and costs.
Read more: Problems with crypto should look for in the Tornado Cash sanctions
Controversial designation
OFAC’s designation of Tornado Cash and its smart wallet addresses has been controversial since it was announced last month.
Crypto think tank Coin Center said in a blog post that this was the first time software, rather than an individual or entity, was added to the SDN list, a point the plaintiffs jumped on.
“Historically, Defendants have used their delegated authority to designate individuals, companies and other entities on the SDN List. For example, on February 25, 2022, OFAC added Vladimir Putin to the SDN List,” the filing states. “Defendants have also designated Blender .io, a virtual currency mixer … Unlike Tornado Cash, Blender.io is operated under centralized control.Unlike Tornado Cash, users of Blender.io do not retain custody of specific cryptoassets at all times and instead receive randomly “blended” cryptoassets .”
Paul Grewal, Coinbase’s chief legal officer, told CoinDesk that while the exchange has “the utmost respect for Treasury and OFAC … the recent designations of Tornado Cash smart contracts gave us serious pause.”
Read more: Arrest of Tornado Cash developers in the Netherlands draws community protest
