Sometimes people surprise you.
I’ve never thought too kindly of Coinbase CEO Brian Armstrong or his company. Armstrong to this day seems like a Palo Alto-bred hive drone who by sheer chance emerged from his Y Combinator-branded birthing pod at a moment when cryptocurrency was a huge, obvious opportunity. His commitment to the principles and ideas behind crypto has often seemed, at best, intermittent.
But this week, Coinbase may have helped shift that narrative, at least a little bit. Thursday, we learned the exchange would back a lawsuit against the U.S. Treasury Department over its recent sanctioning of the Tornado Cash mixing service. The agency alleges that the decentralized software has been used by North Korea to launder funds from its various crypto hacks.
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But Tornado is not hosted by any legally targetable entity and its code can be redeployed on Ethereum by anyone. Therein lies the rub: Because it’s software, sanctioning or otherwise restraining the distribution of that code could be in violation of the First Amendment of the U.S. Constitution.
See also: Cloning Tornado Cash Would Be Easy, but Risky | Opinion
"We support the Treasury sanctioning bad actors and have worked closely with law enforcement to help bring many bad actors to justice. But the Treasury's actions in this case hurt many law-abiding citizens in addition to a few bad actors, and we believe exceeds their authority," Armstrong tweeted on Thursday.
Not just crypto organizations like Coin Center, but also heavyweight digital liberty groups like the Electronic Frontier Foundation have made strong arguments that the sanction is deeply threatening to basic American principles of freedom. As I wrote early last month, a major legal clash was nearly inevitable.
But it’s remarkable that Coinbase was first to push the case forward – and it seems like it has found a doozy of a lawsuit to back. First of all, as a Texan, I have to say that finding people in West Texas to stand as plaintiffs is genius. Even if you’re not an old, wizened husk like me, you probably still associate Waco with one of the most disastrous and tragic exercises of federal government power in history: the apocalyptic raid on the Branch Davidian compound on Feb. 28, 1993. And Texans were extremely skeptical of the Feds well before the lawmen of the Bureau of Alcohol, Tobacco, Firearms and Explosives opened fire on a building full of people, including children.
Now a Texas jury may get to listen to six users describe their own legitimate reasons for using Tornado Cash and the harm inflicted on them by the government. As complicated as crypto and the ethics of privacy may be, I’m comfortable saying I’d prefer being on Coinbase’s side of the table under those circumstances. (Though the fact the plaintiffs are all pretty much crypto insiders may not be in their favor with West Texans.)
It’s also remarkable to ponder Coinbase’s motivations here. As we’ve seen over the past few weeks, the Tornado Cash sanction threatens to deeply undermine the entire crypto ecosystem as various players weigh whether to blacklist addresses that have interacted with the mixing service. So there is a self-interested angle here, especially with regard to Coinbase’s own plans to expand Ethereum staking services, which could generate massive revenue but also potentially put it at risk of sanctions violation for processing transactions.
This isn’t the first time Armstrong or Coinbase has stood up for its users’ financial rights. In 2017, Armstrong took a swing at the Internal Revenue Service (IRS) for the tax agency’s alleged overreach by requesting “John Doe” summons for all Coinbase users. However, the exchange has been more than willing to comply with privacy-invasive searches and regulations, and has a shaky history with customer service – among other more concerning recent events.
So it’s remarkable now that Coinbase has decided to risk incurring regulators’ wrath by going up against the Treasury Department. Most notably, the Treasury doesn’t have direct oversight of the securities law questions that the U.S. Securities and Exchange Commission (SEC) is currently in the thick of debating, but you have to assume Gary Gensler and Janet Yellen get on the phone every once in a while.
So while it may be defending one material business line, Coinbase’s lawsuit would seem to pose a genuine threat to its overall exchange business, if it even marginally nudges the SEC to crack down on its huge traffic in what regulators firmly believe to be unregistered securities.
In other words, it appears – bizarrely, almost unbelievably – that Coinbase and Brian Armstrong may have actually done something on principle.
Sometimes, people surprise you.
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