Crypto Think Tank Coin Center Sues US Treasury Over Tornado Cash Sanctions

Coin Center is backing a second lawsuit against the U.S. Treasury Department, alleging its sanctioning of Tornado Cash overstepped legal bounds.

AccessTimeIconOct 12, 2022 at 4:44 p.m. UTC
Updated Oct 12, 2022 at 9:19 p.m. UTC

Think tank Coin Center is alleging the U.S. Treasury Department’s sweeping sanctions against crypto mixer Tornado Cash harmed Americans and their ability to transact privately using the Ethereum network.

Coin Center filed a lawsuit against the Treasury Department and the Office of Foreign Asset Control (OFAC), its sanctions watchdog, on Wednesday, marking the second suit the advocacy group has filed against the Treasury Department, as well as the second lawsuit filed against Treasury over its Tornado Cash sanctions.

OFAC sanctioned Tornado Cash in August, claiming North Korean hackers had laundered hundreds of millions of dollars’ worth of crypto through the mixer since its launch. Something like 20% of Tornado Cash’s overall transaction volume was tied to one hack or another, the federal government alleged. The crypto industry has opposed the move, pointing to the fact that OFAC does not normally sanction software and the fact that Tornado Cash does not have any central operator.

There are legitimate uses for individuals to use privacy-enhancing tools like Tornado Cash, the suit claimed, and OFAC’s sanctions against the privacy mixer – which works by pooling funds to obfuscate the sender of any given transaction – mean that these individuals now effectively expose their entire transaction history to anyone looking at the network data.

“An order effectively requiring Defendants to decriminalize use of the 20 Tornado Cash addresses would allow Plaintiffs to conduct their legitimate activities with some measure of anonymity, use their preferred software tool without fear of penalties, and engage in important expressive associations,” the suit said. “Judicial relief would also serve the public interest by averting harm to Tornado Cash users who are United States persons, to Ethereum as a freedom and privacy enhancing technology, and to the important sector of the economy that depends on Ethereum.”

Treasury Secretary Janet Yellen and OFAC Director Andrea Gacki are also named as defendants. Patrick O’Sullivan, a Florida-based software developer, David Hoffman, a New York-based investor, and an unnamed Ukraine supporter are other plaintiffs tied to the suit.

Hoffman was “dusted,” meaning someone sent him a small amount of ETH after Treasury sanctioned Tornado Cash, the suit claimed.

“Ethereum users like Mr. Hoffman have no ability to reject incoming transfers. So the criminalization of Tornado Cash empowered someone else to implicate Mr. Hoffman and force reporting obligations on him by causing him to receive an asset from a sanctioned entity,” the suit said. “And it has licensed anyone else who wishes to harass or inconvenience Mr. Hoffman to continue to send crypto assets through Tornado Cash to Mr. Hoffman’s publicly known addresses, each time triggering potential liability and reporting obligations.”

Coin Center filed another lawsuit against Treasury earlier this year, alleging that a tax reporting rule enacted into law last year as part of a broader infrastructure bill is “unconstitutional.” The provision would require taxpayers to collect and report personally identifiable information, such as Social Security numbers, if they receive over $10,000 in cryptocurrency.

The federal government has until Nov. 7, 2022, to file a response.

Another lawsuit, funded by crypto exchange Coinbase, takes aim at the Tornado Cash sanction effort itself.

Like the Coin Center-backed suit, the Coinbase-backed lawsuit filed last month alleges OFAC overstepped its legal bounds in designating an “open-source software project” to its sanctions list.

Part of the plaintiffs’ complaint in the Coinbase suit was the fact they could no longer access ether (ETH) they had locked in Tornado Cash, despite being American citizens not accused of wrongdoing.

Last month, Treasury published guidance telling U.S. persons to apply for a license to withdraw their funds.

Treasury declined to comment on the lawsuit.

UPDATE (Oct. 12, 21:19 UTC): Added that Treasury declined to comment.


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Nikhilesh De

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