Coinbase-Backed Group's Legal Defeat Against Tornado Cash Sanctions

Aug 20, 2023 at 10:29 am

A legal case supported by Coinbase involving a group of cryptocurrency investors and developers has concluded with a loss. The case aimed to argue that the U.S. Treasury Department exceeded its authority by imposing sanctions on Tornado Cash, a service designed to anonymize cryptocurrency transactions.

In his ruling on Thursday, Judge Robert Pitman of the U.S. District Court for the Western District of Texas emphasized that Tornado Cash is a distinct entity with a vested interest in its smart contracts. He rejected the notion that Tornado Cash lacks genuine entity status, highlighting that the Treasury Department indeed designated the decentralized autonomous organization (DAO) governing the mixer as an entity.

Judge Pitman acknowledged the DAO as a self-standing entity with a shared purpose among its voting members. He likened this structure to the shareholders of a corporation, noting that non-participation in a shareholder meeting doesn't alter the entity's framework.

The judge dismissed other arguments from the plaintiffs, including their claim that Tornado Cash lacked property rights in the designated smart contracts and their contention that the sanctions infringed upon First Amendment rights.

The U.S. Treasury Department's Office of Foreign Asset Control (OFAC) sanctioned Tornado Cash, alleging that it facilitated money laundering for malicious actors like North Korea's Lazarus Group, which used stolen crypto funds from decentralized exchanges and games. This move drew swift criticism from the cryptocurrency industry, leading Coin Center to file its own lawsuit about a month after the Coinbase-backed lawsuit.

Coinbase's Chief Legal Officer, Paul Grewal, expressed the company's intention to support an appeal in a statement on the platform formerly known as Twitter (now referred to as X).

In response to the ruling, a Treasury spokesperson released a statement on Friday expressing satisfaction with the outcome. The spokesperson underscored the department's commitment to safeguarding U.S. national security, particularly given North Korea's involvement in virtual currency theft and cybercrime activities that fund its military programs.

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