Tl;dr. Coinbase is financing a lawsuit by six people challenging US Treasury Department's sanction of Tornado Cash smart contract and asking the Court for their removal from the U.S. Sanctions List. This lawsuit claims that OFAC exceeded Congress' authority and the President by sanctioning open-source technology rather than sanctioning bad actors who use it or their property.
Chief Legal Officer by Paul Grewal
Brian Armstrong spoke today about why Coinbase is supporting and funding a challenge made by six people (including two Coinbase employees), against the Treasury Department’s new sanctions on open source software that is associated with Tornado Cash. This legal action is a bit more in depth. This legal challenge centers on how the Treasury Department exceeded Congress' authority to sanction open source technology rather than sanctioning bad actors or their property. While criminals don't want to use crypto protocols, blocking it completely (which is what the sanction basically does) is not what people's elected representatives authorized. This is especially true when there are more effective ways to target bad actors. These sanctions are a significant expansion of OFAC's power and have caused harm to innocent people who were trying to use this technology to protect their privacy and security.
Tornado Cash Sanctions
Treasury's Office of Foreign Assets Control ("OFAC") approved Tornado Cash on August 8, 2022. This open-source software project uses smart contracts to let users send assets privatelly over the Ethereum network. OFAC also added Tornado Cash to its Specially Designated Nationals & Blocked Persons List ("SDN List"). Tornado Cash's smart contract, which is publicly available and open source, was sanctioned by OFAC. Anyone can access the smart contracts to send assets to their private accounts or withdraw them to another crypto address. Smart contracts are code that isn't controlled by anyone or any group. They are executed by the Ethereum network following strict rules that can't be altered.
Although OFAC had previously placed crypto addresses on sanctions lists against individuals and entities, it has never sanctioned open-source technology such as the Tornado Cash smart contract. When OFAC sanctioned North Korean Lazarus Group it added eight Ethereum addresses. Each was an account controlled by the Group and held their assets.
This case saw OFAC add the Tornado Cash smart contract to its SDN List. By making it illegal for any U.S. citizen to use this privacy protocol, they effectively banned this technology from all.
OFAC Exeded Its Authority from Congress and the President in Sanctioning Open Source Technology
The people's representatives in Congress give federal agencies like the Treasury Department the authority to act. This legislation defines the agency's powers. Federal agencies must operate within the limits of their Congressionally-defined authority when they are authorized to do so. Congress has given courts the power to review agency actions that exceed these powers. The remedy is to declare the action illegal. These issues are crucial to prevent executive overreach, and ensure agency actions remain within the limits of what Congress authorized.
These principles were applied to Congress, which passed the International Emergency Economic Powers Act ("IEEPA"), which authorized the President to block transactions and freeze assets of any person deemed to be a threat to America. The President also delegated this power the Treasury to issue sanctions. This delegated power allows OFAC to target individuals and their property, but not their property. *
Because the Tornado cash smart contracts are neither property nor person, we support the legal challenge to Tornado Cash. These smart contracts were added to the SDN List by OFAC, effectively removing the technology from all U.S. citizens. This is in violation of Congress' authority. This challenge seeks to have OFAC remove crypto addresses associated software from its SDN List so that U.S. citizens can use privacy technology again.
First, Tornado Cash open-source smart contracts are not people, even though it may seem obvious. These smart contracts are not lines of code. They are not for humans, corporations, or other organizations. Tornado Cash smart contracts allow a user to deposit tokens at one crypto address and then withdraw the same tokens to another crypto address. They are executed automatically with no human intervention. They can be used as a privacy tool and a technology that is not human or an entity.
The Tornado Cash smart contract is also not property. Property is a thing that is owned or has legal title to. ** Smart contracts are open-source code that is non-proprietary and not controlled by any group or individual. They are programs that run on Ethereum according to predetermined rules and cannot be altered or changed. The Tornado Cash smart contract allows anyone to send Ethereum to it. It will then follow pre-set instructions that neither the original code developers nor the recipients or receivers of funds can alter. These smart contracts are used by individuals to control their assets. They do not give up control to any other person or group. Assets are not mixed or commingled. Instead, they use the privacy code to send their assets and then withdraw them.
These New Sanctions Harm Innocent People and Threaten the Critical Development Of Crypto Privacy Protocols
ETH transactions can be transparently recorded on Ethereum blockchain, unlike traditional finance. Anyone can see the balances and transaction history associated with an address. Users can send ETH to their recipient's address by using a public blockchain Explorer. This allows anyone to view the sender's transactions history, find out about their spending habits and check their account balance.
This transparency is necessary for auditability and verification. However, it presents privacy problems for Ethereum users who legitimately want to protect their financial information. A person receiving their salary in ETH doesn't necessarily want anyone to know how much they spend or what they have spent.
Users could regain their privacy with the Tornado Cash privacy protocol. Smart contracts allow users to deposit and withdraw assets from one crypto account, without revealing any connection to previous transactions. The user can withdraw the assets and transfer them to another address without worrying about their financial history or net worth being exposed to anyone. This lawsuit represents a wide range of crypto developers and users who used Tornado cash to protect their privacy. They wanted to avoid Russian retaliation and conceal salary deposits to hide their earnings. These plaintiffs can avoid disclosing the identities of their personal accounts that they use to store their assets and make personal transactions by creating private crypto addresses to send funds to strangers.
Crypto privacy protocols are crucial to the development and protection of crypto ecosystems. They also protect against thieves and hackers who might otherwise target crypto addresses with significant assets. Not only have the sanctions against Tornado Cash prevented access to this open-source technology for U.S. citizens, but also cryptographers have been discouraged from contributing to important privacy projects in fear that their code might be sanctioned.
Coinbase is committed to fighting illicit finance and supports reasonable regulations and action against bad actors
Coinbase is committed to fighting illicit activity and sanctions evasion. We partner with law enforcement agencies and regulators to advise them on a variety of cryptocurrency topics. We also support crucial law enforcement investigations and respond to thousands of subpoenas each year. We support OFAC's overall national security goals and appreciate its important work to block bad actors and stop them from controlling property. In the Tornado Cash case, OFAC didn't target bad actors or property owned by them. Instead, it sanctioned open source technology, a legitimate tool that is used by many innocent people, even bad actors. This action was not authorized by Congress, which is a good thing. We don't shut down email and the internet code simply because some of its users are criminals. We are supporting six crypto users who want to regain the tools they need to protect their privacy.
*50 U.S.C. SS 1702(a)(1)(B).
**American Heritage Dictionary of the English Language 1412.
Sanctions should target bad actors. Not technology. This story was first published on Medium's The Coinbase Blog. People are responding to the story by highlighting it and commenting.
Title: Sanctions Should Target Bad Actors. Not Technology.
Sourced From: blog.coinbase.com/sanctions-should-target-bad-actors-not-technology-cb541ac6839a?source=rss—-c114225aeaf7—4
Published Date: Thu, 08 Sep 2022 13:32:27 GMT