Investors are suing the Treasury Department to blacklist a crypto platform

A group of cryptocurrency investors sued the Treasury Department on Thursday to block government sanctions barring Americans from Tornado Cash, a popular crypto platform that criminals have used to launder virtual currencies.

The lawsuit, filed in federal court in the Western District of Texas, is funded by cryptocurrency exchange Coinbase, which has clashed with the federal government over its increasingly strict regulation of digital assets. The suit alleges that the Treasury Department exceeded its legal authority by banning Tornado Cash.

The Finance Ministry did not immediately respond to a request for comment.

The department announced last month that it is placing Tornado Cash on a blacklist to prevent hacking, money laundering and other cryptocrimes. Industry groups reacted with fury, arguing that the crackdown would cut off access to a critical tool for preserving privacy.

A so-called cryptocurrency mixer, Tornado Cash, is designed to make it harder for law enforcement and other observers to track crypto transactions. Whenever two people exchange digital currency, the transaction is recorded in a public ledger called a blockchain, which anyone can analyze to track the movement of funds. But when people route their cryptocurrency through a mixer, streams of funds are combined to hide where the money originated.

That makes it a useful tool for criminals. This year, a North Korean-backed hacker group used Tornado Cash to launder more than $455 million, according to the Treasury Department. In total, the department has said, the service has helped criminals launder $7 billion in virtual currency.

Crypto proponents argue that mixers are a neutral tool, often used by those who just want to protect their privacy. One plaintiff in the lawsuit is a crypto investor who used Tornado Cash to send funds to support the Ukrainian war effort, hoping to preserve his anonymity and avoid retaliation from the Russian government.

Unlike some other crypto privacy services, Tornado Cash is not a traditional company run by a team of executives. It is a set of “smart contracts” – pieces of code that work independently of any device.

That difference is at the heart of the plaintiffs’ legal argument: They argue that the Treasury Department lacks the authority to limit access to a software program.

“It is important that the law’s distinction between people and code is respected,” said Paul Grewal, Coinbase’s general counsel. “If that disrespect is allowed to stand, there could be all kinds of other ways that statutes are twisted and bent to apply to crypto in ways that they shouldn’t be.”