4 Key Points in the Legal Challenge to U.S. Treasury’s Tornado Cash Sanctions

The six individuals seeking to overturn the U.S. Treasury’s sanctions on Tornado Cash argued that the government has improperly interpreted the IEEPA and free speech clause of the First Amendment.

Coinbase’s chief legal officer Paul Grewal summarized the key points made by plaintiffs in a reply brief filed on May 24. 

The plaintiffs make 4 points here, but they all come down to the same problem. The Govt. is trying to ban the use of an open-source software using a property sanctions statute. Because this isn’t what the law was meant to do, they can’t make the law fit this case. 2/7

— paulgrewal.eth (@iampaulgrewal) May 24, 2023

The legal action was filed by six individuals in September, a month after the U.S. Treasury Department sanctioned the Ethereum-based coin mixer Tornado Cash over its alleged use in laundering illicit funds. The lawsuit received public backing and funding from Coinbase, with Brian Armstrong saying in a blog that the exchange had a responsibility to defend the crypto industry against legal actions that go too far.

In the latest reply brief, the plaintiffs’ first argument was that the sanctions rely on the assumption that anyone who holds the TORN token is a member of a legally recognized entity “Tornado Cash.” The plaintiffs asserted that Tornado Cash cannot be classified as an unincorporated institution based on the Treasury’s own definition of the term.

The second argument concerns how the Treasury fails to explain how open-source smart contracts can be classified as property. Since smart contracts are immutable, and cannot be owned or controlled by anyone as such, the imposition of sanctions on them while deeming them to be property should not have any legal standing.

In the third argument, the plaintiffs state that even if these smart contracts were to be somehow considered property, the Tornado Cash entity has no “interest” in them. Interest, in this context, refers to a legal, equitable, or beneficial interest in property required by the International Emergency Economic Powers Act (IEEPA). 

The final argument alleges that the Treasury’s sanctions violate the First Amendment concerning the right to free speech. The users of the protocol did so to protect their privacy, particularly while making important and anonymous donations to parties in need of it.

“The Govt’s answer is worrisome. Basically, it is “go speak somewhere else.” But the 1A is stronger than that. The Govt. can’t simply tell law-abiding Americans to go exercise their freedom in some other venue with far fewer personal protections,” explained Grewal.