Daily Briefing: Fighting back

Coin Center has suggested that the Treasury’s Office of Foreign Assets Control overstepped its legal authority and is weighing a legal battle.

Sanctioning Tornado Cash

We’re just over a week out from the Treasury Department’s unprecedented move to sanction Tornado Cash, and the fallout has been swift and dire. Almost immediately, centralized service providers such as Circle and GitHub severed ties with the pariah software, frontends across the ecosystem began denying service, and multiple wallets were blocked by various applications for having tainted “Tornado ETH” in them. Altogether, the mood last week was one of panic, consternation, and asking ourselves, “what do we do now?”

The Treasury’s decision sent a shiver throughout the space for a number of reasons, but the primary cause for concern seems to be the unprecedented step of issuing sanctions against a piece of software rather than a “person” or “entity,” as is normally the case. Persons and entities are clearly definable parties and counterparties to a transaction, and the Treasury’s Office of Foreign Assets Control can forbid these transactions by placing persons or entities on the sanctions list.

By including a piece of software (open-source software, no less) on the U.S. sanctions list, the Treasury has effectively made it a crime to interact with Tornado Cash—you’ll note that there are no active links to Tornado Cash anywhere in this letter because we do not recommend that you check it out. To make matters worse, some jokers are apparently “protesting” the sanctions by dusting the wallets of prominent crypto personalities (and others) with ETH funneled through Tornado Cash, opening the very serious question of what liabilities the targets now face.

All of this is to say that the consequences of the Treasury’s move are just getting started and will likely result in legal challenges to the government’s categorization of a piece of open source code as a sanctionable entity. Crypto advocacy group Coin Center is positioning itself as a frontline champion of the space in this desperate and trying hour, publishing a lengthy post Monday outlining the possible legal case it might attempt to make. It’s worth reading in its entirety, and whether or not Coin Center is ultimately the group to bring the case, the argument it presents—that code is not a sanctionable entity—is one that could see the inside of a courtroom sooner or later.

The crypto industry is subject to many disagreements, but everyone that cares about this space seems to be on the same page on this one. Bad actors have used Tornado Cash to their benefit, and it’s even possible the government will make the case that it was intentionally designed to facilitate illegal activity (the arrest of one of Tornado’s key developers last week seems to suggest some suspicion of criminal intent). Still, I have not heard anyone suggest that the best way to solve this problem is to make it punishable to use a freely-available software. The implications of that are harrowing, to say the least.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.