Coinbase Funds Lawsuit Against Treasury Department for Sanctioning Tornado Cash

America’s largest cryptocurrency exchange is supporting a legal challenge against the U.S. Treasury Department following its sanctions against the privacy protocol Tornado Cash.

The lawsuit’s plaintiffs include 6 individuals who have personally used the mixer, some of which include Coinbase employees.

Defending Tornado’s Use Cases

As reported by CNBC, Coinbase’s senior security risk analyst said he used Tornado Cash to anonymize his cryptocurrency donations to Ukraine, for fear of being targeted by Russian hacking groups. 

Vitalik Buterin – co-founder of Ethereum – admitted last month that he also used Tornado Cash to donate to Ukraine, but to protect the recipient’s identity rather than his own.  Given such examples, the lawsuit argues that the sanctions are hurting ordinary people who have used Tornado Cash for legitimate, non-criminal reasons. 

“Each is an American who simply wants to engage in entirely lawful activity in private,” reads the lawsuit. 

The Treasury Department argued that Tornado had been used by North Korean hackers to launder over $3 billion in crypto transactions over the past three years. One such example pertained to the $600 million Axie Infinity hack in March, from which stolen funds once comprised as much as 15% of Tornado volume. 

A more recent report found that about 75% of laundered ETH is transferred by criminals to Tornado Cash in order to cover their tracks. 

Defending Open-Source Code

The Office of Foreign Assets Control (OFAC) has previously sanctioned other cryptocurrency mixers like Blender for their North Korean involvement. However, crypto proponents argue that the Tornado sanctions are qualitatively different, as they involve sanctioning open-source code rather than a specific group. 

“We saw this as a much larger problem,” said Paul Grewal – Coinbase’s Chief Legal Officer – to CNBC. “It sets a dangerous precedent — if this code can be designated without any limits imposed by law, any technology any tool or system could be fair game.”

Cryptography professor and ZCash expert Matthew Green also voiced concern over the Treasury’s move last month. He argued that they could set a precedent for the U.S. government to sanction scientific speech while imposing a “chilling effect” on private internet companies from spreading similar code. 

Coinbase presented a similar argument in a follow-up blog post on Thursday. 

“At a time when we should be encouraging innovation, this kind of fear and uncertainty will do the opposite — making developers wonder if, by pushing the industry forward, they could be putting themselves at risk,” stated the company.

Days after the sanctions were implemented, a 29-year-old developer suspected of helping design Tornado Cash was arrested by authorities. He has since been denied bail and will remain in prison until at least late November.