Crypto Engineers, Investors Sue US Treasury Over Tornado Cash Sanctions

The Treasury’s sanctions watchdog, OFAC, exceeded its authority in blacklisting smart contract wallets, six plaintiffs allege in a new suit.

AccessTimeIconSep 8, 2022 at 1:17 p.m. UTC
Updated Sep 8, 2022 at 7:14 p.m. UTC

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

Six crypto users are suing the U.S. Treasury Department for blacklisting Tornado Cash last month, claiming the department’s sanctions watchdog overstepped its authority in prohibiting all American persons from interacting with the privacy tool.

According to the suit filed in the U.S. District Court for the Western District of Texas, the Treasury Department’s Office of Foreign Assets Control (OFAC) didn't have the legal right to designate Tornado Cash, which the suit refers to as “a decentralized, open-source software project that restores some privacy for Ethereum users,” as a sanctioned entity because it isn't 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 is made up of blacklisted individuals or companies that are owned by, or are acting on behalf of, countries targeted by OFAC.

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 Alex Fisher and former Amazon engineer Joseph Van Loon. Crypto exchange Coinbase is funding the effort.

Each of the plaintiffs has some ether (ETH) locked in Tornado Cash that he or she used for various legal purposes – including donating to Ukraine and protecting their private wallets from being traceable to their public online identities – but can no longer access because of the OFAC’s sanctions, the suit claims.

Alongside Treasury, the plaintiffs are suing Treasury Secretary Janet Yellen and OFAC Director Andrea Gacki.

The plaintiffs are claiming OFAC violated the Administrative Procedures Act, which dictates how federal agencies must develop and issue regulations, because Tornado Cash isn't property or a foreign national or country, and therefore the sanctions watchdog exceeded its authority.

The filing also claims a violation of the plaintiffs’ First Amendment rights to “engage in important, socially valuable speech.”

Preston Van Loon, Almeida and Welch are also claiming a violation of their Fifth Amendment rights, which protect against self-incrimination, as they didn't receive a notice or any other form of prior process before their ETH was frozen.

As a result, the plaintiffs are calling on the court to “declare that defendants’ designation is null, void, and with no force and effect; declare that defendants’ designation is not in accordance with law; … vacate the designation; permanently enjoin defendants’ and their officers, employees and agents from enforcing, implementing, applying or taking any action whatsoever under, or in reliance on, the designation,” and litigation costs.

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, corporations and other entities on the SDN list. For instance, on February 25, 2022, OFAC added Vladimir Putin to the SDN list,” the filing said, referring to the Russian president. “Defendants have also designated Blender.io, a virtual currency mixer … Unlike Tornado Cash, Blender.io is operated under centralized control. Also unlike Tornado Cash, users of Blender.io do not retain custody of particular crypto asset at all times and instead receive randomly ‘mixed’ crypto assets.”

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 the Tornado Cash smart contracts gave us serious pause.”

The Treasury Department didn't immediately respond to a request for comment.

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Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

CoinDesk - Unknown

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

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