Coinbase bankrolls lawsuit against Treasury over Tornado Cash sanctions

Coinbase, the largest U.S.-based cryptocurrency exchange, is bankrolling a lawsuit against the Treasury Department over its decision to sanction a program that allowed North Korean hackers and other illicit actors to launder billions of dollars’ worth of digital tokens.

Treasury’s targeting of the service, the so-called crypto mixer Tornado Cash, sparked an outcry from crypto interests. They criticized the decision last month as an unprecedented assault on computer code and a potential violation of the Constitution’s free speech protections. At least one group, the crypto think tank Coin Center, threatened legal action.

But Coinbase is the first to follow through, sponsoring a court challenge that six plaintiffs are filing today in federal court in Texas. All of them are individuals who say they formerly used Tornado Cash for legitimate purposes and have been financially damaged by the sanctions; two of them are Coinbase employees.

It is a potentially risky move that thrusts Coinbase — a publicly-traded company that has seen its stock drop by 73 percent this year amid a broader downturn in the crypto market — into a fraught national security debate.

Coinbase general counsel Paul Grewal said in an interview the company has a “unique responsibility to support that cause given our role in the crypto ecosystem.” He pointed to Coinbase’s status as “the first significant public crypto company anywhere in the world,” and its in-house resources, including “some of the most specialized expertise on these sanctions questions anywhere on the planet.”

The suit argues that Treasury overstepped its legal authority by sanctioning software, rather than a person or an entity. And it claims the department infringed on the plaintiffs’ First Amendment rights by barring them from using a tool that enabled them to exercise their free speech.

Top crypto company defies U.S. sanctions on service that hid stolen assets

Grewal said Coinbase identified the plaintiffs by surveying its own workforce in the wake of the sanctions to find out whether Treasury’s move effected them and people they know.

“We came to understand that we had employees inside of Coinbase who were relying upon Tornado Cash to do things like donate money to relief efforts in Ukraine and to protect their transactions and salary information from prying eyes,” he said. “Ordinary people doing ordinary things suddenly swept up in designations that had no basis in law.”

The Tornado Cash program works by pooling digital assets from different sources before users withdraw them, a function that aims to break the traceability of the digital tokens on the public ledger known as the blockchain. Tornado Cash processed more than $7 billion worth of crypto since its 2019 launch, according to Treasury.

Tornado Cash defenders say most of that sum was legitimately acquired crypto. But in June and July, 41 percent of funds that went through the program were linked to hacks and other thefts, according to blockchain analytics firm TRM Labs. Tornado Cash had become a preferred tool of the Lazarus Group, a hacking gang that carries out digital heists to help fund the North Korean regime and its weapons program, according to investigators. The group used it to process more than $455 million they stole earlier this year in the largest-ever virtual theft.

Grewal argued Treasury has other means at its disposal to target bad actors using the program to cover their digital tracks. “We have a ton of respect for the Treasury’s role here and their responsibility, but they, too, must act according to law,” he said.

This is a developing story and will be updated.

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