Coinbase funds a lawsuit against the U.S. Treasury over Tornado Cash sanctions due to the $7 billion crypto laundering scheme

Last month, we reported the story about Tornado Cash after Dutch authorities announced they had arrested a 29-year-old man believed to be a developer for the cryptocurrency mixer. The announcement came just a few days after the US Treasury put the notorious crypto startup on its sanctions list.

Fast forward about a month later, crypto exchange Coinbase is now joining a lawsuit against the U.S. Treasury Department to block sanctions barring Americans from using the Tornado Cash app. The US government has accused the virtual currency mixer of helping hackers launder proceeds for cybercrimes.

A crypto mixer, also known as a tumbler or blender, is a service that mixes different streams of potentially identifiable cryptocurrency to improve the anonymity of transactions and harder to trace. Tornado Cash is one of the largest crypto tumblers identified as “notorious” by the U.S. Treasury.

In a lawsuit filed Thursday in a U.S. district court in Texas, six users of Tornado Cash accused the Treasury Department of violating constitutional rights to free speech and overstepping its authority in sanctioning the cryptocurrency mixer.

The lawsuit stated that while the Treasury Department’s Office of Foreign Assets Control (OFAC) has certain sanctions authority, its jurisdiction does not extend to software code and smart contracts.

“Tornado Cash is not a person, entity, or organization. It is a decentralized, open source software project that restores some privacy for Ethereum users,” the lawsuit said.

In a blog post, Coinbase CEO Brian Armstrong said that the Treasury Department had gone too far “by sanctioning an entire technology instead of specific individuals.”

“[There] are legitimate applications for this type of technology and as a result of these sanctions, many innocent users now have their funds trapped and have lost access to a critical privacy tool,” Armstrong added.

In a statement in August, the US Treasury said it sanctioned Tornado Cash for laundering more than $7 billion worth of virtual currency since its inception three years ago.

“Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned virtual currency mixer Tornado Cash, which has been used to launder more than $7 billion worth of virtual currency since its creation in 2019. This includes over $455 million stolen by the Lazarus Group, a Democratic People’s Republic of Korea (DPRK) state-sponsored hacking group that was sanctioned by the U.S. in 2019, in the largest known virtual currency heist to date. Tornado Cash was subsequently used to launder more than $96 million of malicious cyber actors’ funds derived from the June 24, 2022 Harmony Bridge Heist, and at least $7.8 million from the August 2, 2022 Nomad Heist. Today’s action is being taken pursuant to Executive Order (E.O.) 13694, as amended, and follows OFAC’s May 6, 2022 designation of virtual currency mixer Blender.io (Blender).”

Tornado Cash is an Ethereum blockchain-based crypto mixing service that allows users to gain a cloak of anonymity when transferring crypto assets. The U.S. sanctions announced on Monday by the Office of Foreign Assets Control (OFAC) followed allegations that Tornado Cash was helping conceal billions in capital flows, including for North Korean hackers.