Coinbase is funding a lawsuit against the U.S. Treasury Department's Office of Foreign Asset Control for sanctions against Tornado Cash issued last month.
The lawsuit, filed Thursday in a Texas federal court, alleges that the government exceeded its authority to block financial transactions benefitting terrorists. According to a blog post published by the company Thursday morning, the Treasury Department’s sanctions instead “harm innocent people, remove privacy and security options for crypto users, and stifle innovation.” Six individuals are plaintiffs, two of whom are Coinbase employees.
The Treasury Department sanctioned Tornado Cash on Aug. 8, arguing the cryptocurrency mixing tool, which the company says is useful for ensuring users' privacy, was used to launder over $7 billion. At least $455 million of that money was stolen by the Lazarus Group, a North Korean state-sponsored project, the government said.
But the lawsuit has since raised numerous questions and concerns for those working in and holding cryptocurrency. It is the first time Treasury's OFAC has sanctioned a decentralized entity for which there is no clear ownership, raising the question of whether other services whose transactions could be traced to the mixer — like cryptocurrency exchanges, for example — are themselves in violation of U.S. sanctions. This type of activity, many cryptocurrency advocates say, is impossible to prohibit in a decentralized marketplace where some major overseas exchanges have been criticized for playing fast and loose with know-your-customer principles and where currencies are transacted along immutable ledgers.
In the weeks since, entities like stablecoin issuer Circle have frozen accounts tied to Tornado Cash, surprising many users who did not predict they could be in violation of U.S. sanctions. The arrest of a developer in the Netherlands who helped build Tornado Cash has also made many working in the industry fearful their projects could also be in some way tied to Tornado Cash, and their own work found to be in violation of sanctions.
Coinbase is certainly one of those entities that may be in OFAC’s crosshairs, particularly after the forthcoming Ethereum merge. Many have wondered whether the platform, slated to be the third biggest validator on the ETH network, could be in violation of sanctions should any of the transactions it validates be found to have passed through Tornado Cash. Haseeb Qureshi, managing partner at Dragonfly Capital, argued last week that there was a “very high likelihood” Coinbase would freeze transactions traced to Tornado Cash.
But others pointed out that the company has already hinted at taking legal action against the sanctions, with CEO Brian Armstrong tweeting about his opposition to them. Now, it is clear that the company is taking the offensive.
“At Coinbase, we’ve been fighting illicit activity since the very beginning, and while we share Treasury’s commitment to fighting crime, we believe this action harms innocent people and threatens the future of decentralized finance (DeFi) and web3 specifically,” the company’s blog post reads.