The US government’s arguments for sanctions on the Ethereum mixer Tornado Cash are ‘dangerously flawed’. This was stated by Coinbase’s chief legal officer Paul Grewal in a new lawsuit against the Treasury.
Grewal summarized his arguments on Twitter. He argues that authorities are attempting to ban open-source software under the property sanctions law.
“The law is not intended for this, [the government] cannot make it suitable for this situation,” Grewal wrote.
The lawyer disputed the Treasury’s assumption that “any holder of a native TORN token is a member of the Tornado Cash legal entity”:
“This is novel as a legal theory and factually wrong.”
His second argument concerns the government’s inability to explain how the immutable open-source smart contracts at the heart of this privacy software can constitute “property” subject to sanctions.
“The legal definition of property is something you can own. But the immutable open-source smart contracts that underpin this privacy software cannot be owned, controlled, or altered by anyone,” Grewal noted.
From this, he says, follows a third conclusion: no one, including the creators, developers or holders of the TORN tokens, has an “ownership interest” in these smart contracts.
“The government relies only on the claims that Tornado Cash will seek to profit from broader use of the immutable smart contracts. Yet none of the members of the organization is an ‘interested party,’ as required by the IEEPA,” the statement reads.
Fourth, the Treasury’s suit violates the First Amendment, which protects freedom of speech.
“The sanctions against Tornado Cash are unconstitutionally burdensome on speech under the First Amendment. The plaintiffs used the software to protect their privacy and to make important donations,” Grewal noted.
Overall, the government’s arguments have “caused concern” for Coinbase’s chief legal officer.
“The government cannot simply tell law-abiding Americans to exercise their freedom somewhere else with far fewer safeguards,” added Grewal.
Earlier in the process, the U.S. Treasury, during the lawsuit challenging the legality of blocking the Tornado Cash crypto mixer, compared holders of TORN tokens to terrorists from “Al-Qaeda” [designated a terrorist organization and banned in several countries].
As a reminder, in August 2022 the OFAC added Tornado Cash to the sanctions list, a site through which, according to the agency, criminals laundered more than $7 billion in cryptocurrency. Of that, more than $455 million is tied to the North Korean hacking group Lazarus Group.
Soon after, Coinbase funded the lawsuit against the Treasury, its head Janet Yellen, and OFAC director Andrea Gaki, seeking to lift the sanctions on the mixer.
In April 2023, the Bitcoin exchange also joined the appeal in the case.