Coinbase is backing plaintiffs who want sanctions imposed by the United States government against crypto mixer Tornado Cash removed.

The filing by Joseph Van Loon, Tyler Al-meida, Alexander Fisher, Preston Van Loon, Kevin Vitale, and Nate Welch, hereby as the plaintiffs, is against the United States Office of Foreign Assets Control (OFAC); Janet Yellen, the Secretary of the Treasury; Andrea Gacki, the Director of OFAC, who are the defendants in this case.

Plaintiffs, representing United States citizens prohibited from using Tornado Cash, are supported by Coinbase. They are moving a motion for partial summary judgment at the United States District Court of Texas, Austin Division.

OFAC, in August 2022, added Tornado Cash to the Specially Designated Nationals And Blocked Persons List (SDN) List.

It is a list of individuals and entities subject to economic sanctions prohibiting United States citizens or businesses from using or doing business with them.

Tornado Cash is a cryptocurrency mixer that allows users to increase the privacy of their transactions on Ethereum, a smart contracting platform.

With the sanctions being in place for six months now, the lawsuit was filed in a bid to remove the ban on Tornado Cash. The plaintiffs argue that sanctions on Tornado Cash are unlawful and should be set aside under the Administrative Procedure Act (APA).

The case involves two statutes: the International Emergency Economic Powers Act (IEEPA) and the North Korea Sanctions and Policy Enhancement Act of 2016. 

Plaintiffs, backed by Coinbase, argue that the government cannot sanction Tornado Cash because it is not a foreign national or person, as it is just software. They also contend that smart contracts at the software’s core cannot be controlled or owned by anyone. Therefore, these sanctions on Tornado Cash violate the First Amendment.

A few months ago, Coinbase backed a legal challenge to sanctions imposed by the US govt against Tornado Cash. Today the plaintiffs filed a motion for summary judgment, asking the court to reopen TC for all. Their arguments are simple but powerful. 1/10 https://t.co/xSngWKxM3x

— paulgrewal.eth (@iampaulgrewal) April 5, 2023

Coinbase has stated that the government’s actions could set a dangerous precedent for the future of cryptocurrency regulation. If the OFAC can sanction immutable, open-source software code, it could, in their view, ban intangible concepts that cannot be classified as property. Subsequently, this could hinder the growth and development of the entire cryptocurrency industry, stunting innovation.

The use of privacy protocols like Tornado Cash is becoming increasingly important for individuals who want to protect their privacy online. 

On Ethereum, a public ledger maintained on a decentralized network, users can send and receive assets from their virtual wallets without the intervention of a third party. However, considering the public nature of the public blockchain, anyone can easily trace another person’s transactions.

Tornado Cash affords users increased privacy by using open-source and autonomous smart contracts powering a token mixer. Users deposit tokens in a smart contract and receive a secret key that can be used to withdraw an equivalent amount into a different wallet while obfuscating the transaction trail.

This makes it more difficult to connect spending from one wallet with the owner of another wallet. However, this feature has seen the tool being abused by hackers, some of whom are tied to North Korea’s Lazarus Group cell.

Analysts say the outcome of this legal challenge could have significant implications for the future of cryptocurrency regulation in the United States. If the court rules in favor of the plaintiffs, it could signal a shift towards more privacy-friendly policies and regulations for cryptocurrency transactions.

However, if the court upholds the sanctions, it could set a precedent for the government to regulate and restrict the use of privacy protocols.

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