Introduction

A district court judge sided with the US Treasury Department in a lawsuit related to Coinbase and the penalties imposed on cryptocurrency mixer Tornado Cash.

The decision came as a blow to six plaintiffs who challenged the agency’s authority to impose sanctions on Tornado Cash last year.

Plaintiffs say Tornado Cash is software

According to the Aug. 17 filing, District Court Judge Robert Pittman issued a summary judgment in favor of the Treasury Department, thus denying the motion by plaintiffs Joseph Van Loon, Tyler Almeida, Alexander Fisher, Preston Van Loon, Kevin Vitale and Nate Welch. These individuals have challenged the authority of the Treasury Department, alleging that it overstepped its bounds by sanctioning Tornado Cash.

This comes after the Treasury Department’s Office of Foreign Assets Control classified Tornado Cash as Specially Designated Nationals, which bars individuals and companies within the United States from conducting financial interactions with Mixer.

The plaintiffs argued that Tornado Cash — which aims to provide privacy protections for Ethereum users — is software, not a legal entity. Therefore, the imposition of such sanctions, as they claim, falls outside the scope of the Treasury Department’s legal powers.

Bateman disagreed. He said that Tornado Cash possesses the characteristics of an association and that its decentralized, autonomous organizational structure qualifies it as an entity subject to OFAC regulations.

Coinbase supports Tornado Cash

Coinbase financially supported the legal challenge against the Treasury Department’s action. Plaintiffs Almeida and Welch are both Coinbase employees.

The cryptocurrency exchange and other advocates, such as the nonprofit Coin Center and the Blockchain Association, have expressed concerns about the penalties imposed on Tornado Cash.

Coinbase’s chief legal officer, Paul Grewal, indicated an intent to appeal the decision. In a post on X (formerly Twitter), he said that the exchange believes in the legality of challenging OFAC’s actions.

He stressed the importance of reviewing the Fifth Circuit in resolving these matters.

Coinbase faces legal issues

Coinbase faces several legal issues in its own right. The San Francisco-based company is in an ongoing lawsuit with the US Securities and Exchange Commission (SEC).

The similarity in the arguments made by Grewal in both the OFAC and SEC cases highlights the recurring theme of regulatory expansion and the need to limit the scope of power granted to regulators by Congress.

Conclusion

The US Treasury Department’s victory in the lawsuit against Coinbase and Tornado Cash has significant implications for the cryptocurrency industry. It reaffirms the authority of regulatory bodies to impose sanctions on entities involved in illicit activities, even if they are software-based.