Updated: Sep 27, 2022
Coinbase filed a complaint against OFAC due to the Tornado Cash Sanctions.
Background: Tornado Cash, including the purported entity, the website tornado.cash, 37 smart contracts, and an address that was used to accept donations to develop the project were added to the OFAC SDN List on August 8, 2022. This was the first ever sanction against open-source code. OFAC alleged that the mixer was used to launder money.
Lawsuit. The lawsuit challenges the addition of Tornado Cash to the SDN List because it’s an unprecedented, overbroad action that exceeds OFAC’s statutory authority and infringes on their constitutional rights and the ability of law-abiding Americans to engage freely and privately in financial transactions. Credit. Appreciate Coinbase stepping up to the plate - even though it’s probably in their financial interest to do this, it’s also good for the overall industry. This sanction could lead to a slippery slope, and the best time to nip it in the bud is with the first.
Code. Tornado Cash code was developed over several years, by many contributors. Plaintiffs and other law-abiding citizens are now prohibited from depositing, withdrawing, sending, or receiving funds through Tornado Cash, even when the funds have no connection to illicit activity.
Sanction Authority. When the President delegated sanction authority to OFAC, it was limited to activities involving the property of a foreign country or a foreign national. Since Tornado Cash smart contracts are immutable open-source software code, they are not property, a foreign country, or national thereof, or a person of any kind.
Why Texas? One of the Plaintiffs, Joseph Van Loon, an Application Security Engineer, resides in Cedar Park, Texas. Mr. Van Loon has an Eth ENS name that can be traced to his identity. He used Tornado Cash to send money to a new, more private wallet in anticipation of running an Ethereum validator node. Once the sanction was placed on tornado cash, he had to abandon his plan to run the validator node and lost out on the potentially valuable business opportunity.
Use Cases. Another plaintiff, Mr. Tyler Almeida, Senior Security Risk Analyst at Coinbase, used Tornado Cash to donate relief funds to the Ukrainian government. He wanted to use a private wallet because he was afraid the public wallets would be targeted by Russian state-sponsored hacking groups, and to prevent his financial history from being associated with his political views. In fact, since making the transaction, the anonymized wallet received unwanted air drops of non-fungible tokens from potentially malicious external sources.
Trapped Funds. Mr. Almeida has 0.3 ETH locked in Tornado cash today, and another Plaintiff, Mr. Nate Welch, has 1.2 ETH trapped.
International Emergency Economic Powers Act (IEEPA) - the President has authority to take certain actions after “declaring a national emergency concerning an unusual and extraordinary threat, which has its source in whole or substantial part outside the US.” On April 1, 2015, Obama declared a national emergency against “malicious cyber-enabled activities” and authorized the Secretary of the Treasury to block “property and interests in property” related to identified “persons.”
No chance to appeal. This case is different from the Blender.io sanction because was a legal “person”- it operated under centralized control, and was a custodial service. If a sanction is against a person, they can apply for delisting, but no such application is possible here because the Tornado Cash open-source code is not owned by anyone. Without an injunction, the designation will prevent Plaintiffs and others who are similarly situated from using the Tornado cash protocol or from lawfully accessing their funds that were in pools at the time of the sanction.
Free Speech. By providing a certain degree of privacy, Tornado Cash allows Plaintiffs to engage in important, socially valuable speech. Now can’t make donations to support important and controversial political and social causes. OFAC has prohibited a substantial amount of protected speech relative to the plainly legitimate sweep of the defendant’s actions.
Due Process. The Plaintiffs with money trapped in a pool did not receive any process prior to their deprivation of property. The denial of any pre-deprivation process whatsoever is unjustified by any national security interests, and the risk of erroneous deprivation of property is intolerably high under the fifth amendment.
Prayer for Relief. Declare the designation null and void with no force and effect, that the designation was not by the law, contrary to constitutional rights, and over the statutory jurisdiction and should be vacated and set aside. OFAC should be permanently enjoined from enforcing this designation. Plaintiffs should be awarded their costs of the litigation and any other relief the court deems just and proper.
OFAC Updated its four FAQs on Sept 13, 2022
1076 - OFAC designated the “entity” Tornado cash for facilitating the laundering of proceeds of cybercrimes from North Korea state-sponsored hackers. Interacting with open-source code itself, in a way that does not involve a prohibited transaction with Tornado Cash, is not prohibited. For example, US persons would not be prohibited from copying the open-source code (good luck finding it now the GitHub and website are deleted), discussing it, teaching about it, and writing it in textbooks.
1077 - No US persons can transact with Tornado cash.
1078 - If you got dusted, and received a nominal amount of funds from tornado cash, OFAC considers their sanction regulations to apply, but will not prioritize enforcement against the delayed receipt of a blocked transaction report and subsequent annual reports of blocked property.
1079 - If you sent funds to Tornado Cash but did not complete the mixing transaction before the Aug 8 designation, you should apply for a license to OFAC to get your funds. To get the license, you need to disclose the wallet address, transaction hash, date, time, and amount.
Tether ignores the Sanctions. Tether is just ignoring these nonsensical sanctions and has not blacklisted any tether-holding addresses that OFAC has sanctioned. Circle went in the opposite direction and blocked all addresses associated with tornado cash. Tether is not a US person, and does not operate in the US.
Chilling Effect. This type of action has a chilling effect on the industry. The creator of the JoinMarket, Chris belcher, has gone quiet. JoinMarket is a very important privacy project and if he’s gone, it’s a massive loss to Bitcoin.
There are reports of other developers also going dark. The devs are gone, their corporate knowledge, their pseudonyms, etc. These developers are extremely talented individuals with a myriad of opportunities, so working for free on the Bitcoin project. Why would you risk potentially going to jail when you could be doing other stuff? Sadly, that’s impacting how people behave.
Full Story. We just don’t know the full story here, it’s possible the dev, Alex Peertsev was making money from helping terrorists cover their tracks. He’s still being held in custody by Dutch authorities, but has not been charged with anything. In the Dutch legal system, they can hold him for 90 days without charging him. Protesters gathered in Amsterdam and changed, “Writing code is not a crime.”
I hope he gets out of jail and this lawsuit wins, and developers keep building for the future!
Check out the corresponding HODLCast
By Sasha Hodder, Crypto Attorney