Coinbase is fighting back as SEC shuts down Tornado Cash

Coinbase is fighting back as SEC shuts down Tornado Cash – Mail Bonus


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 against Tornado Cash. And on September 9, Securities and Exchange Commission (SEC) Chairman Gary Gensler announced that he is working hard with Congress to craft legislation to increase cryptocurrency regulation.

But these two stories are not mutually exclusive. The scenario proves that governments are merely reactive rather than proactive when it comes to decentralized finance (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 creation in 2019, including more than $455 million stolen by the North Korea-linked Lazarus Group.

Coinbase CEO Brian Armstrong said in a statement that the Treasury went too far and took “the unprecedented step of punishing an entire technology instead of specific individuals.” In addition to arguing that the sanctions exceeded the department’s authority, Coinbase argued that the actions were:

  • Remove privacy and security for crypto users;
  • Harm innocent people; and
  • Stifle innovation.

The next day, Gensler doubled down on his push for tougher regulation of the DeFi market, claiming that crypto companies would not thrive without it. “Nothing about crypto markets is inconsistent with the Securities Act. Investor protection is equally important, regardless of the underlying technology.”

Connected: The US Treasury Department clarifies that publishing Tornado Cash codes does not violate sanctions

His choice of words like “independent of the underlying technology” not only betrays his lack of understanding of crypto and blockchain technology, but his speech drew an outcry from the Web3 community, with many claiming that government regulations are wolves in sheep’s clothing.

Jake Chervinksy, a lawyer and head of policy at the Blockchain Association, tweeted in response: “Crypto is a novel and unique technology: how it should be regulated is a big question for Congress (not the SEC chairman) to decide.”

Security legislation is worrying enough. But the Tornado Cash sanctions set a dire standard for anyone involved in 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 a myriad of legitimate applications for such blockchain technology.


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

In this case, one of the plaintiffs used the mixer to donate funds to Ukraine anonymously. Another was an early adopter of cryptography and now has a significant following on social media, with his official ENS name linked to his Twitter account. He used the smart contract to protect his security while trading. Now their assets are stuck 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 type of regulation recently proposed by Gensler, the SEC and other governments around the world.

Connected: Crypto Investors Backed by Coinbase Sue US Treasury Department After Tornado Cash Sanctions

As is the case with these sanctions, I find arresting people for using services for legitimate and even benign activities, not to mention locking up developers for writing open source code that wasn’t illegal when it was created, kind of Orwellian level of dystopian .

Treasury officials have since backtracked, clarifying in guidance that in fact “interacting with the open source code itself, in a way that does not involve a prohibited transaction with Tornado Cash, is not prohibited.” The instructions add that copying the code of the protocol, publishing the code and visiting the website are all allowed.

Although not officially linked, the timing and similarities between the two stories are telling. Gensler likened regulation to traffic enforcement, saying, “Detroit wouldn’t have taken off without some traffic lights and police on the beat.” Using the analogy of freeways and kidnappings, Armstrong said: “Penalizing open source software is like permanently closing a highway because robbers used it to escape a crime scene.” And he is not wrong.

How many talented programmers will now be diverted from writing game-changing code that could not only benefit industries, but help people around the world? A small number of bad actors should not hinder the progress of a technology with so much potential to revolutionize sectors beyond finance.

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 a freelance writer by night. He has been covering digital culture since 2007.

This article is for general informational purposes 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 authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.


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