Coinbase, the largest US-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 illegal actors to launder billions of dollars worth of digital tokens.
Coinbase Bankrolls Lawsuit Against Treasury Over Tornado Cash Sanctions
But Coinbase is the first to follow through, sponsoring a legal challenge that six plaintiffs are filing today in federal court in Texas. All of them are individuals who say they previously used Tornado Cash for legitimate purposes and have been financially harmed by the sanctions; two of them are Coinbase employees.
It’s a potentially risky move that thrusts Coinbase — a publicly traded company that has seen its shares tumble 73 percent this year amid a broader crypto market downturn — into a fraught national security debate.
Coinbase general counsel Paul Grewal said in an interview that 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 internal resources, including “some of the most specialized expertise on these sanctions issues anywhere on the planet.”
The suit alleges that Treasury overstepped its legal authority by sanctioning software, rather than a person or entity. And it claims the department violated the plaintiffs’ First Amendment rights by preventing them from using a tool that enabled them to exercise their free speech.
Grewal said Coinbase identified the plaintiffs by surveying its own workforce in the wake of the sanctions to determine whether Treasury’s moves affected them and people they know.
“We understood that we had employees inside Coinbase who relied on 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 were suddenly swept up in designations that had no basis in law.”
The Tornado Cash program works by pooling digital assets from various sources before users withdraw them, a feature 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 in crypto since its launch in 2019, according to Treasury.
Tornado Cash defenders say most of this sum was legitimately acquired crypto. But in June and July, 41 percent of funds passing through the program were linked to hacks and other thefts, according to blockchain analytics firm TRM Labs. Tornado Cash had become a tool of choice for the Lazarus Group, a hacking gang that carries out digital heists to help finance the North Korean regime and its weapons program, according to investigators. The group used it to process more than $455 million it stole earlier this year in the biggest virtual heist ever.
Grewal argued that Treasury has other means at its disposal to target bad actors who use the program to cover their digital tracks. “We have a ton of respect for the Treasury Department’s role here and their responsibilities, but they also have to act according to the law,” he said.
This is a developing story and will be updated.
