Coinbase Challenges Treasury Over Tornado Cash Sanctions

Coinbase’s Chief Legal Officer, Paul Grewal, has recently voiced strong criticism against the U.S. Treasury’s actions towards the Ethereum mixer protocol, Tornado Cash. Grewal argues that the Treasury is “bending old laws past their breaking point” in its efforts to apply sanctions to this cryptocurrency service, which is designed to enhance user privacy by obscuring the details of transactions.

Cryptocurrency mixers like Tornado Cash provide anonymity by masking the origin and destination of blockchain transactions, offering a semblance of privacy on otherwise transparent public ledgers. However, this functionality has drawn scrutiny from regulators, who hold that developers and holders of the TORN governance token should be accountable if the service is used for illicit activities.

In response to these concerns, in 2022, the U.S. Treasury’s Office of Foreign Asset Control (OFAC) imposed sanctions on Tornado Cash. This was followed by federal charges against the founders, Roman Storm and Roman Semenov, for allegations including money laundering and operating an unlicensed money-transmitting business.

Pushing back against these legal actions, Tornado Cash has initiated a lawsuit against the U.S. government, a move that has garnered support from Coinbase. The crux of the legal debate, as highlighted by Grewal, centers on whether immutable, open-source software code can be classified as property—a definition which would fall under the regulatory purview of the Treasury.

Grewal elaborated on his position in a series of tweets, stressing the problematic nature of regulating software code as property when it is, in fact, an open-source material that doesn’t traditionally qualify as such under current legal frameworks. This stance is pivotal because the Treasury’s authority is typically confined to regulating “property” in which a foreign national has an interest.

Coinbase has underscored the broader implications for the crypto industry if the Treasury were to extend its authority to sanction software like Tornado Cash. Coinbase CEO Brian Armstrong likened sanctioning open-source software to “permanently shutting down a highway because robbers used it to flee a crime scene.” He argues that such measures would not only be ineffective in addressing the underlying issues but would also unjustly penalize innocent users and diminish overall privacy and security within the digital space.

As the legal proceedings continue, the outcome of this case could set a significant precedent for how software, especially in the realm of cryptocurrency, is treated by regulatory bodies in the United States.