Crypto Engineers and Investors Sue U.S. Treasury Over Tornado Cash Sanctions

American citizens are suing the U.S. Treasury Department for blacklisting Tornado Cash last month, claiming the department's sanctions watchdog exceeded its authority.

The suit filed by the U.S. District Court for the Western District of Texas alleges that the OFAC (Office of Foreign Assets Control) at the Treasury Department lacked the legal standing to designate Tornado Cash, described as a "decentralized, opensource software project that restores some privacy for Ethereum users," as a sanctioned entity since it isn't an entity, person or organization.

North Korean hackers used Tornado Cash's wallet addresses, including smart wallet addresses, to launder crypto stolen from projects like Axie Infinity, according to OFAC. OfAC's SDN list (Specially Designated Nationals and Blocked Persons List) consists of blacklisted individuals or companies owned by or acting on behalf of countries targeted for sanctions.

Several plaintiffs in this lawsuit include Tyler Almeida and Nate Welch, who are employees of Coinbase, Prysmatic Labs co-founder Preston Van Loon, engineer Kevin Vitale at GridPlus, Ethereum proponent and angel investor Alex Fisher, and a former engineer at Amazon Joseph Van Loon. Funds are coming from crypto exchange Coinbase to pursue the effort.

In the lawsuit, each plaintiff claims to have ether (ETH) locked in Tornado Cash that they have used for legal purposes, including donating to Ukraine and protecting their private wallets from tagging their public online identities but is unable to access it due to OFAC sanctions.

In addition to Treasury, the plaintiffs are suing OFAC Director Andrea Gacki and Treasury Secretary Janet Yellen. According to the plaintiffs, OFAC exceeded its authority because Tornado Cash is not a foreign national or country and therefore violated theAdministrative Procedures Act.

Additionally, the plaintiffs claim that their First Amendment rights to "engage in important, socially valuable speech" have been violated. As

Preston Van Loon, Almeida and Welch did not receive a notice or any other prior process before their ETH was frozen, they claim their Fifth Amendment rights, which protect against self-incrimination, were violated.

Accordingly, the plaintiffs request that the court declare the defendants' designation null, void, and without force and effect; declare that the defendants' designation is unlawful; vacate the designation; permanently enjoin the defendants' officers, employees, and agents from enforcing, implementing, applying, or taking any action under, or in reliance on, the designation; and to compensate for litigation costs.

A Determination of controversy and discord: OFAC's legal determinations associated with Tornado Cash and its smart wallet addresses have been controversial and aroused a high degree of resentment in the Crypto community since it was announced last month. It is well known that this was the first time software appeared on the SDN List rather than an individual or entity, and it is a stance the plaintiffs have taken. Because the Treasury action affects anyone using Tornado Cash, not just those engaged in money laundering or other criminal activities, the action was criticized within the crypto industry. Generally, the SDN list is used to identify people involved in terrorism, enemy states, or other state-sanctioned activities so that they cannot profit from the U.S. financial system.

In the past, defendants have used their delegation authority to designate individuals, corporations, and other entities for inclusion on the SDN list. OFAC added Vladimir Putin to the SDN list on February 25, 2022, according to the filing. The defendants also designated Blender.io, a virtual currency mixer... Blender.io is controlled centrally, unlike Tornado Cash. In contrast to Tornado Cash, Blender. io users do not retain ownership of a particular crypto asset and instead receive randomly 'mixed' crypto assets."

Paul Grewal, Coinbase's chief legal officer, told CoinDesk that while the exchange has "the utmost respect for Treasury and OFAC … the recent designations of the Tornado Cash smart contracts gave us serious pause." The Treasury Department didn't immediately respond to a request for comment.

—Crypto Weekly