Lawyers Challenge Tornado Cash Penalties, Alleging IEEPA Violation
Lawyers representing a group of cryptocurrency developers and investors have filed a lawsuit challenging the penalties placed on the Tornado Cash protocol. The lawsuit alleges that the US Treasury Department’s sanctions violate the International Emergency Economic Powers Act (IEEPA). by failing to accurately identify a foreign entity and property associated with Tornado Cash.
In addition, the plaintiffs argue that the sanctions infringe the rights of freedom of expression and that the ban on open source software is an attack on free speech.
LAWSUIT POINTS FIRST AMENDMENT CONCERNS
The plaintiffs’ arguments center on government meddling and violation of United States First Amendment rights due to the overly broad nature of the sanctions, which implies that the case is more about protecting individual liberties than establishing specific regulations for new technologies.
In their court submission, filed Wednesday night, the plaintiffs contend that the Treasury Department has not established ownership of the immutable smart contracts underlying the Tornado Cash protocol and thereby suggest that the Treasury Department’s characterization of Tornado Cash as an unincorporated association does not meet the necessary criteria for such an association.
The defendants assert that the Department’s actions would prevent law-abiding US citizens, including the plaintiffs, from engaging with open source code and exercising a wide range of First Amendment-protected freedoms of expression.
Furthermore, the statement held that there is no evidence to suggest that token holders have collaborated to operate or promote the Tornado Cash privacy protocol, challenging the notion of a “common purpose” as stated by the Treasury Department.
While Tornado Cash has been associated with hackers who use the protocol to hide their illicit earnings, law enforcement experts warn against automatically viewing the protocol as complicit in money laundering. The plaintiffs state in their court filing that the evidence linking Tornado Cash to money laundering is weak. They point out that the Treasury Department has only provided three money laundering examples of millions of transactions involving the protocol.
COINBASE CONTINUES TO OPPOSE TO THE BAN OF TORNADO CASH
Coinbase, a major cryptocurrency exchange, has also expressed support for the lawsuit. At the same time, Coinbase’s chief legal officer, Paul Grewal, provided a summary of the arguments on Twitter. He claimed that the government is trying to use a proprietary sanctions law to ban open source software, which defeats the original purpose of the law.
Argument #1: These sanctions depend on assuming that anyone who happens to hold a digital token (TORN) is a member of a legally-recognized entity called “Tornado Cash.” That’s novel as a legal theory, and it’s wrong as a factual matter. 3/7
— paulgrewal.eth (@iampaulgrewal) May 24, 2023
However, Alexey Pertsev, the creator of Tornado Cash, is currently on trial in the Netherlands for alleged money laundering. Pertsev recently obtained the right to question Chainalysis, a blockchain analytics company that is frequently cited in court for on-chain evidence.