Coinbase Lawyer Optimistic as Tornado Cash Ban Faces ‘Powerful’ Legal Challenge: Will the US Treasury Back Down?

The crypto world is watching closely as the legal battle against the US government’s ban on Tornado Cash intensifies. Paul Grewal, Chief Legal Officer at Coinbase, has voiced strong optimism about the ongoing lawsuit, suggesting that the arguments presented are “powerful” and could lead to a reversal of the controversial prohibition. Are we about to see a significant shift in the regulatory landscape for crypto privacy? Let’s dive into the details.

What’s the Buzz About Tornado Cash and the Ban?

For those unfamiliar, Tornado Cash is a crypto mixer – a tool designed to enhance privacy in cryptocurrency transactions. Think of it as a way to obscure the trail of crypto funds, making it harder to trace transactions back to their origin. However, the US Treasury Department took a significant step in August 2022 by adding Tornado Cash to its Specifically Designated Nationals and Blocked Persons (SDN) list. This effectively banned US individuals and entities from using the service, citing concerns about its use in laundering illicit funds.

This ban sparked outrage and raised serious questions about privacy in the crypto space. Critics argued that the blanket ban was an overreach, penalizing legitimate users who sought privacy for lawful purposes. This is where the legal challenge comes in.

Coinbase Steps Up to Support Legal Action

Leading US crypto exchange Coinbase has thrown its weight behind the legal challenge against the Tornado Cash ban. Paul Grewal, Coinbase’s Chief Legal Officer, has been a vocal advocate for overturning the ban. Recently, Grewal took to Twitter, where he has over 30,000 followers, to share his positive outlook on the lawsuit. He believes the plaintiffs have a strong case and are making significant headway in their fight against the US Treasury Department.

Paul Grewal, Chief Legal Officer of Coinbase, sharing updates on Twitter

Grewal highlighted a recent summary judgment motion filed in a Texas court. He explained that Coinbase is supporting this appeal, which was initiated after the US Treasury Department’s decision to blacklist Tornado Cash. The core argument? The plaintiffs are urging the court to reinstate access to Tornado Cash for everyone, emphasizing that their arguments are both “straightforward and effective.”

Why is the Ban Being Challenged? Key Arguments Unveiled

The lawsuit, initiated in September 2022, argues that the US Treasury Department overstepped its legal boundaries by designating Tornado Cash as an SDN. The plaintiffs contend that this designation infringes on fundamental rights, particularly the First Amendment right to free expression. But what are the specific legal arguments being put forward? Grewal breaks down the four pillars of the challenge:

1. Argument 1: Tornado Cash is not a ‘national’ or ‘person’. According to Grewal, the law only allows the government to sanction foreign ‘nationals’ or ‘persons’. Tornado Cash, being software, doesn’t fit this definition. He argues that software, or even a decentralized group of token holders, cannot be classified as a ‘national’ or ‘person’ subject to sanctions.
2. Argument 2: Sanctions target ‘property’, but Tornado Cash is uncontrollable. The law permits sanctions on a person’s ‘property’ – something that can be owned or controlled. However, Tornado Cash’s 20 smart contracts are immutable and operate autonomously. No single entity can alter, remove, or control them, rendering them outside the scope of ‘property’ that can be sanctioned.
3. Argument 3: No sanctioned entity owns the smart contracts. Even if the smart contracts could be considered ‘property’, they are not owned or controlled by any sanctioned foreign entity or individual. Attributing ownership to a loosely defined group of token holders is also legally tenuous.
4. Argument 4: The ban is unconstitutionally broad. The plaintiffs argue that the sanctions are overly broad and violate the US Constitution. They prevent law-abiding citizens from using Tornado Cash for legitimate privacy purposes simply because some individuals have misused it for illicit activities. This, they argue, is a violation of free speech and the right to privacy.

Privacy vs. Security: A Critical Balancing Act

Grewal acknowledges the inherent tension between privacy and security. “Whenever we give everyone privacy, there is a risk that privacy will be abused,” he states. However, he emphasizes that the US Constitution and legal framework recognize that the potential for abuse by a few should not justify denying privacy to everyone. The lawsuit highlights that thousands of law-abiding Americans rely on tools like Tornado Cash to protect their online privacy in an increasingly transparent digital world.

What’s Next in this Legal Saga?

The lawsuit is currently at a “critical stretch,” as Grewal puts it. The summary judgment motion is a crucial step, and the court’s decision will be pivotal in determining the future of Tornado Cash and, more broadly, the approach to crypto privacy regulation in the US. The crypto community is keenly awaiting the outcome, as it could set a precedent for how decentralized technologies and privacy tools are treated under US law.

In Conclusion: A Battle for Crypto Privacy

The legal challenge against the Tornado Cash ban is more than just a fight for a specific crypto mixer. It’s a battleground for the broader principles of privacy, innovation, and regulatory overreach in the digital age. Coinbase’s support and Paul Grewal’s optimistic stance signal a significant pushback against what many perceive as overly restrictive measures. As the case progresses, the crypto world will be watching closely to see if the courts will side with privacy advocates and potentially reshape the regulatory landscape for crypto in the US. Will the “powerful” legal arguments be enough to overturn the ban and redefine the boundaries of crypto privacy? Only time will tell.