Coinbase Confronts U.S. Treasury: A Legal Battle Over Tornado Cash That Could Reshape Crypto Regulation!

Tornado Cash challenges the US authorities
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For years, the U.S. crypto scene has been battling what it sees as outdated laws and regulatory requirements that no longer apply to the new technological environment. The Tornado Cash case is seen as a prime example of this situation. Coinbase‘s Chief Legal Officer, Paul Grewal, has openly criticized the U.S. Treasury’s approach to sanctioning the crypto mixer. According to Grewal, the U.S. Treasury is “bending old laws past their breaking point” in its efforts to control this technology.

Tornado Cash, a cryptocurrency mixer, is designed to enhance privacy for transactions on public blockchains by obscuring the details of the sender and receiver. This functionality, however, has drawn scrutiny from regulators. The U.S. Treasury’s Office of Foreign Asset Control (OFAC) imposed sanctions on Tornado Cash in 2022, asserting that developers and holders of the TORN governance token could be held accountable for the mixer’s use in illicit fund transfers.

The legal battles escalated when federal prosecutors charged Tornado Cash founders Roman Storm and Roman Semenov with various offenses, including money laundering and operating an unlicensed money-transmitting business. Tornado Cash, supported by Coinbase, initiated a lawsuit against the U.S. government in response.

Read our Tornado Cash reports here.

Tornado Cash Case: its founders and developers facing legal scrutiny and charges in different jurisdictions, notably in the United States and the Netherlands. In the US, Tornado Cash, a popular crypto-mixing service, was sanctioned by the Treasury Department in August 2022 for allegedly facilitating billions of dollars in money laundering, including transactions linked to North Korean hackers. The founders, Roman Storm and Roman Semenov, were charged by the U.S. DOJ. Tornado Cash developer Alexey Pertsev was arrested and charged in the Netherlands over money laundering and facilitating criminal activities through the Tornado Cash platform. His sentencing is expected to be delivered on May 14, 2024.

The lawsuit, backed by a coalition of Tornado Cash users and funded by Coinbase, challenges the Treasury’s actions as “unprecedented and overbroad.” It also targets several key figures, including Treasury Secretary Janet Yellen and OFAC Director Andrea Gacki, highlighting the controversial addition of Tornado Cash to the Specially Designated Nationals and Blocked Persons (SDN) list.

Paul Grewal‘s post on X revolves around the nature of open-source software code, which he argues is not “property” and, therefore, falls outside the regulatory purview of the Treasury. The Treasury is only authorized to regulate property interests held by foreign nationals. This argument is pivotal, as it addresses fundamental questions about the scope of regulatory authority over software code.

If Treasury wishes to regulate American citizens’ use of open-source software code like Tornado Cash, it must seek authority from Congress.

Paul Grewal on X (link)

The broader crypto industry is keenly watching this case, as its outcome could set a precedent for how regulators might treat similar technologies in the future. As the case progresses, the crypto and legal communities are left to ponder the implications of this legal struggle, not just for Tornado Cash but for the future of blockchain technology’s intersection with regulatory frameworks.

This lawsuit not only challenges specific legal interpretations but also sets the stage for a broader debate on the balance between technological innovation and regulatory oversight in the burgeoning field of cryptocurrency.

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