Coinbase Fights Back as SEC Approaches Tornado Cash

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On September 8, Coinbase announced that it was filing a lawsuit against the US Treasury Department. The cryptocurrency exchange is funding a lawsuit filed by six people challenging the sanctions on Tornado Cash. And on September 9, Securities and Exchange Commission (SEC) chairman Gary Gensler announced that he was working hard with Congress to create legislation to increase cryptocurrency regulation.

But these two stories are not mutually exclusive. The sequence of events proves that governments are purely reactive rather than proactive when it comes to decentralized financing (DeFi).

Tornado Cash was sanctioned by the Office of Foreign Assets Control (OFAC) in August. OFAC claimed that the smart contract mixer has helped launder more than $7 billion worth of cryptocurrency since its inception in 2019, including more than $455 million stolen by North Korean-affiliated hackers Lazarus Group.

Coinbase CEO Brian Armstrong said in a statement that Treasury went too far and “took the unprecedented step of sanctioning an entire technology rather than specific individuals.” In addition to claiming the sanctions exceeded the department’s authority, Coinbase argued the measures:

  • Remove privacy and security for crypto users;
  • harm innocent people; and
  • stifle innovation.

The next day, Gensler redoubled his push for tighter regulation of the DeFi market, claiming that crypto firms would not thrive without it. “Nothing about the crypto markets is incompatible with securities laws. Investor protection is just as relevant regardless of the underlying technologies.”

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Related: US Treasury Clarifies Publishing Tornado Cash Code Doesn’t Violate Sanctions

Not only does his choice of words such as “regardless of the underlying technologies” betray his lack of understanding of crypto and blockchain technology, but his speech sparked outrage from the Web3 community, with many arguing that government regulation is a wolf in sheep’s clothing.

Jake Chervinksy, a lawyer and chief of policy at the Blockchain Association, tweeted: “Crypto is a new and unique technology: How to regulate it is an important question for Congress (not the SEC chair) to decide. “

Security legislation is already worrying enough. But the Tornado Cash sanctions are an alarming benchmark for anyone involved with digital assets. Not only are blockchain technology and cryptography constantly changing — what’s secure now may not be secure in the near future, and almost certainly won’t be secure next year — but there are countless legitimate uses for blockchain technology, for example.

DeFi is all about privacy. The clue is in the name – decentralized finances. Mixers like Tornado Cash further protect the privacy of its users by mixing users’ deposits and withdrawals into liquidity pools, hiding their addresses and protecting their identities. Users want to protect the privacy of their transactions for a variety of legal reasons.

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In this case, one of the plaintiffs used the mixer to anonymously donate money to Ukraine. Another was an early adopter of crypto and now has a significant following on social media, with his public ENS name linked to his Twitter account. He used the smart contract to protect his security during transactions. Now their assets are trapped in Tornado Cash.

A person’s finances contain some of their most sensitive personal information. And law-abiding citizens have the right to keep this private. But it is precisely this privacy that will be eroded by the kind of regulation recently proposed by Gensler, the SEC and other governments around the world.

Related: Crypto Investors Backed by Coinbase Sue US Treasury Department Over Tornado Cash Sanctions

As is the case with these sanctions, arresting people for using services for lawful and even benevolent acts, not to mention jailing developers for writing open source code that wasn’t illegal at the time, feels like creation, as Orwellian levels of dystopian .

Treasury officials have since come back and clarified in the guidance that, in effect, “interacting with open source code itself, in a manner that does not involve a prohibited transaction with Tornado Cash, is not prohibited.” The guidance adds that copying the code from the protocol, publishing the code, and visiting the website are all allowed.

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While not officially related, the timing and similarities between the two stories are telling. Gensler likened regulation to traffic control, saying, “Detroit wouldn’t have left without some traffic lights and tailored police.” Armstrong used an analogy of highways and robberies by saying, “Penalizing open source software is like closing a highway permanently because robbers used it to flee a crime scene.” And he is not wrong.

How many talented developers will now be stopped from writing groundbreaking code that can not only innovate industries but help people around the world? A small number of bad players should not hinder the advancement of a technology with such enormous potential to revolutionize sectors beyond just the financial sector.

The Coinbase lawsuit is a pivotal case in cryptocurrency history, and the outcome – whatever it is – will have huge implications for DeFi. And of course its users.

Zac Colbert is a digital marketer by day and freelance writer by night. He has been involved in digital culture since 2007.

This article is for general information purposes only and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author only and do not necessarily reflect or represent the views and opinions of TBEN.

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