Coin Center preparing to challenge the U.S. Treasury in court over Tornado Cash ban

A leading crypto-focused policy think-tank announced in a blog post that it is exploring legal action against the Treasury Department, arguing that OFAC “exceeds its statutory authority.”

In a Monday blog post, Coin Center executive director Jerry Brito and research director Peter Van Valkenburgh presented a detailed legal analysis of the Tornado Cash case. “By treating autonomous code as a “person” OFAC exceeds its statutory authority,” they wrote, pointing out the logical inconsistency of sanctioning a smart contract, which is essentially just a piece of computer code.

Brito and Van Valkenburgh stated that the ban on Tornado Cash “potentially violates constitutional rights to due process and free speech, and that OFAC has not adequately acted to mitigate the foreseeable impact its action would have on innocent Americans.”

Unlike the similar ban introduced in May on cryptocurrency mixer Blender.io, which was said to have processed $20.5 million out of the $620 million stolen from Axie Infinity's Ronin Bridge, the Tornado Cash ban is against the law, Coin Center directors claim. The crucial difference between the two services lies in a degree of decentralization. Blender.io is “an entity that is ultimately under the control of certain individuals,” hence placing it on OFAC's list of Specially Designated Nationals, or SDNs, actually makes sense. Tornado Cash, on the other hand, can’t be subject to sanctions, as the entity behind the development of the application currently has zero control over its operations.

“Unlike Blender, the Tornado Cash Entity can’t choose whether the Tornado Cash Application engages in mixing or not, and it can’t choose which ‘customers’ to take and which to reject,” said Brito and Van Valkenburgh.

“While typical OFAC actions merely limit expressive conduct (e.g. donating money to a particular Islamic charity), this action sends a signal—indeed seems to have been intended to send a signal—that a certain class of tools and software should not be used by Americans even for entirely legitimate purposes. Even if this listing is truly and exclusively aimed at stopping North Korean hackers from using Tornado Cash, and even if the chilling effect on the use of the tool by Americans for legitimate reasons was acceptable to OFAC in a collateral impact analysis, it may not be sufficient to a court,” they added.

Tornado Cash, a decentralized crypto mixer, was sanctioned by the U.S. Treasury on August 9 for alleged laundering of about $7 billion worth of cryptocurrencies since its creation in 2019. From now on, US citizens are barred from using the service even for legitimate purposes, an unprecedented move against a piece of code. A few days after, Dutch police arrested a suspected Tornado Cash developer, who was later revealed to be Alexey Pertsev, on money laundering charges.

Following the OFAC decision, many privacy advocates and crypto industry leaders rallied to the defense of the blacklisted service. The Electronic Frontier Foundation, a digital rights watchdog, said it was “deeply concerned” about the Tornado Cash ban. And Vitalik Buterin openly admitted that he used the mixer to donate to Ukraine.

Coin Center is a Washington-based nonprofit research and advocacy organization focused on crypto and blockchain-related public policy issues. In June 2022, Coin Center filed a lawsuit against the U.S. Treasury over an “unconstitutional” tax reporting rule that required all taxpayers who receive over $10,000 in crypto to report the Social Security numbers and other personal data of the sender.

“Coin Center’s mission is to defend the rights of individuals to build and use free and open cryptocurrency networks: the right to write and publish code – to read and to run it. The right to assemble into peer-to-peer networks. And the right to do all this privately,” Brito and Van Valkenburgh wrote.