Coinbase is footing the bill for a lawsuit filed against the Treasury Department on Thursday by users of the recently sanctioned crypto service, Tornado Cash.
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The six plaintiffs include Coinbase employees and other users of the mixing service that was blacklisted by the Treasury’s Office of Foreign Assets Control (OFAC) in August.
Mixing services like Tornado Cash are used to obfuscate crypto transactions, which, although anonymous, are easily traceable. The Treasury Department argued that this particular service had been used to launder more than $7 billion worth of digital currency over the past three years by North Korean hackers and other malicious actors.
But in some cases, mixing services are used for legitimate privacy reasons. One complainant, a senior security risk analyst at Coinbase, used the service to anonymize donations to Ukraine for fear that his address would be targeted by Russian hacking groups. Another worried about the safety of his family.
“Each is an American who simply wants to engage in entirely legal activity in private,” according to the lawsuit.
The sanctions were a one-time Treasury decision to blacklist open source software, against an entity or person. Crypto enthusiasts have argued that the move is an overshoot, sets a new legal precedent, and could have negative ripple effects for the tech industry.
“We saw this as a much bigger issue,” Coinbase Chief Legal Officer Paul Grewal told CNBC. “It sets a dangerous precedent – if this code can be designated without any limits imposed by law, any technology, tool or system could be fair game.”
Grewal, a former assistant general counsel at Facebook, said this could have a chilling effect on innovation. He compared the Tornado Cash storyline to police chasing armed robbers on a highway. In order to catch the criminals, “we will not prohibit any use of this highway”. Grewal said this is the first time Coinbase has financially supported an external lawsuit and plans to pay plaintiffs’ attorneys and other costs associated with pursuing the claims in federal court.
Thursday’s lawsuit argues that the decision went beyond Treasury authority and, as Coinbase put it in a blog post, uses “a hammer instead of a scalpel.” The plaintiffs say this caused financial harm because their money is still locked to Tornado Cash and harmed users who rely on the tools for privacy reasons. The case asks the court to remove Tornado Cash smart contracts from the US sanctions list.
Coinbase is the largest US crypto exchange by trading volume and has publicly advocated for crypto reforms in Washington, while dealing with a series of recent SEC investigations. The Securities and Exchange Commission recently requested information from Coinbase on the list of cryptocurrencies that the agency believes may have been unregistered securities. The SEC is also looking into its crypto rewards program, known as staking.
“We have advocated for regulatory reform across Washington and that work will continue,” Grewal said. “We can continue to cooperate and partner with the agencies that are being challenged in this case, because it’s not about questioning anyone’s good faith, but about ensuring that the rule of law applies.”
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Coinbase Funds Lawsuit Against Treasury Department Over Tornado Cash Sanctions
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