Coin Center Says Biden Administration 'Criminalized' Open Source Code

The crypto industry’s fight back has begun.

Coin Center, a non-profit advocacy organization representing the web3 industry in Washington D.C., sued the U.S. Treasury Department on Wednesday for sanctioning the smart contracts of decentralized crypto mixing protocol, Tornado Cash.

Shockwaves

The Treasury Department’s Office of Foreign Assets Control, or OFAC, sent shockwaves across the crypto sector when it added Tornado Cash to its Specially Designated Nationals list on Aug. 8, marking the first time that code was added to the sanctions list.

The move made it illegal for U.S. persons to interact with Tornado Cash’s smart contracts or addresses associated with the protocol, prompting Centre, the consortium behind the USDC stablecoin, to blacklist 38 addresses holding 75,000 USDC.

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“The Biden Administration criminalized the use of Tornado Cash, an open source software tool that helps Americans maintain their privacy while using cryptocurrency and related assets,” states the 36-page lawsuit.

The complaint, which was filed in U.S. District Court in Pensacola, Florida, seeks to remove Tornado Cash from the sanctions list and prevent the Treasury Department from taking action against “ordinary Americans exercising their self-evident and basic rights to privacy.

Financial Privacy

Challenging the federal government’s regulatory actions is a difficult task. Yet Coin Center’s move may rally the crypto community to defend values that have long animated the industry’s activities. Financial privacy, open source code sharing, and operating outside the bounds of traditional banks and regulation are key drivers in the growth of the $1T industry.

“If this precedent is allowed to stand, OFAC could add entire protocols like Bitcoin or Ethereum to the sanctions list in future, thus immediately banning them without any public process whatsoever,” Jerry Brito, the executive director of Coin Center, tweeted. “This can’t go unchallenged.”

Coin Center argues that while privacy is normal for salaried employees and charitable donors in the context of the legacy economy, privacy is not the default on Ethereum unless users utilize a mixing service like Tornado Cash to obfuscate transactions.

The organization also argues that the International Emergency Economic Powers Act that underscores the U.S. sanctions regime clearly states that sanctions “can block U.S. persons from transacting with a foreign person or majority foreign entity or the property of that person or entity.”

Exceeded Authority

With Tornado Cash comprising code and not a person, Coin Center believes the sanctioning of Tornado Cash exceeded the regulatory authority of the government.

“When we or our co-plaintiffs use the Tornado Cash tools, we do so as normal, privacy seeking Americans,” the complaint said. “We do not engage in any transactions with any foreign person or entity or their property… At no point are we relying on any third party for these transactions and at no point are we transacting with a sanctioned person.”

‘If this precedent is allowed to stand, OFAC could add entire protocols like Bitcoin or Ethereum to the sanctions list in future.’

Coin Center lawsuit

The lawsuit’s co-plaintiffs include the anonymous operator of the 688th Support Brigade — a volunteer organization that used Tornado Cash to collect donations to support Ukrainian soldiers, and Patrick O’Sullivan — a software developer who used Tornado Cash to maintain financial privacy, and David Hoffman of Bankless.

The lawsuit received widespread support from the Blockchain Association and other crypto organizations on social media.

Uphill Battles

“We appreciate the tough and uphill battles you guys fight on behalf of our industry,” tweeted Dylan Grabowski, an editor at NEO News Today.

John Whelan, the managing director of crypto and digital assets at Banco Santander in Madrid, said the Treasury Department failed to acknowledge Tornado Cash’s in-built compliance features. “A user can easily prove their source of funds if requested, and they ignored that” he posted.

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Following the Tornado Cash sanctions, many crypto users feared the Feds were out to do more than punish protocols that neglected to register tokens as securities — a longtime goal of the U.S. Securities and Exchange Commission.

It looked like the Administration was determined to restrict the use of crypto-related software itself.

But some experts observed that the sanctions sought to target North Korea’s state-sponsored hacking group, Lazarus, which used Tornado Cash to allegedly launder funds stolen in major hacks targeting web3 protocols.

Ill-gotten Gains

“Tornado Cash was viewed as a tool being used predominantly to obscure ill-gotten gains by the Lazarus Group, and the purpose and the goal of the Treasury Department was to deprive that enemy of the United States from a tool that it was using to launder money,” Jake Chervinsky, head of policy at the Blockchain Association, said in a recent appearance on The Defiant Podcast. “While that’s understandable to a degree… it makes no sense to sanction a neutral tool that can be used by anyone, just because a particular bad actor happens to decide to use that tool.”

Underlying Code

The Treasury Department is already responding to the backlash against its Tornado Cash sanctions. On Sept. 13, the Treasury published guidance stating that U.S. residents can request a specific license to withdraw funds from the platform.

The Treasury also clarified that while transacting with the Tornado Cash protocol is prohibited, U.S. persons are able to interact with its underlying code, including making the code available to view online, or discussing the code in written publications.