A group of cryptocurrency investors on Thursday sued the Treasury Department 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 lawsuit argues that the Treasury Department exceeded its legal authority by banning Tornado Cash.
The Treasury Department did not immediately respond to a request for comment.
The department announced last month that it would blacklist Tornado Cash to prevent hacking, money laundering, and other crypto crimes. Industry groups reacted furiously, arguing that the crackdown would cut off access to an important privacy protection tool.
Tornado Cash, a so-called cryptocurrency mixer, claims to make it harder for law enforcement officials and other observers to track crypto transactions. Every time two people exchange digital currencies, the transaction is recorded on a public ledger called a blockchain, which anyone can analyze to track money movements. But when people run their cryptocurrency through a blender, streams of money are combined to disguise where the money is coming from.
That makes it a useful tool for criminals. This year, a North Korean-backed hacking group used Tornado Cash to launder more than $455 million, according to the Treasury Department. In total, according to the ministry, the service has helped criminals launder $7 billion worth of virtual currencies.
Crypto supporters argue that blenders are a neutral tool often used by those who simply want to protect their privacy. One plaintiff in the lawsuit is a crypto investor who used Tornado Cash to send funds in support of Ukraine’s war effort, hoping to maintain 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’s a set of “smart contracts” – pieces of code that work independently of an entity.
This distinction is at the heart of the plaintiffs’ legal argument: They allege that the Treasury Department has no authority to restrict access to a software program.
“It’s important that the legal distinction between people and code is respected,” said Paul Grewal, Coinbase’s chief legal officer. “If this disrespect persists, there could be all sorts of other ways in which laws are twisted and bent to apply them in ways that they shouldn’t be.”