Coinbase is supporting a lawsuit filed on Thursday against the Treasury Department by six users of a recently sanctioned cryptocurrency service. According to the Treasury, the service assisted in the laundering of billions of dollars from state-sponsored bad actors. However, crypto enthusiasts argue that sanctioning crypto code is an overreach that could have a negative impact on the tech industry. “It sets a dangerous precedent,” Paul Grewal, Coinbase’s chief legal officer, tells CNBC. Coinbase is footing the bill for a lawsuit filed against the Treasury Department on Thursday by users of the recently sanctioned crypto service, Tornado Cash.
The six plaintiffs include Coinbase
 The employees and other users of the mixing service that was blacklisted by the Treasury’s Office in August, the Office of Foreign Assets Control (OFAC) was established. Tornado Cash and other mixing services are used to obfuscate crypto transactions, which, while anonymous, are easily traceable. The Treasury Department claimed that North Korean hackers and other bad actors used this service to launder more than $7 billion in digital currency over the last three years.
However, mixing services are used for legitimate privacy reasons in some cases. One plaintiff, a senior security risk analyst at Coinbase, used the service to anonymize donations to Ukraine for fear of being targeted by Russian hacking groups. Another was concerned about the safety of his family. “Each is an American who simply wants to engage in entirely lawful activity in private,” according to the lawsuit.
Treasury’s decision to blacklist open source software rather than an entity or person was a first. Crypto enthusiasts have argued that the move was a mistake because it establishes a new legal precedent that could have a negative impact on the tech industry. “We saw this as a much larger problem,” Paul Grewal, Coinbase’s chief legal officer, told CNBC. “It establishes a dangerous precedent: if this code can be designated without any legal constraints, any technology, tool, or system could be fair game.”
Grewal, a former Facebook deputy general counsel, believes it could have a chilling effect on innovation. He compared the Tornado Cash scenario to cops pursuing armed robbers on the highway. “We wouldn’t ban all use of that highway” to catch the criminals, Grewal said, adding that this is the first time Coinbase has financially supported an external lawsuit and that the company plans to pay for the plaintiffs’ lawyers as well as other costs associated with pursuing the claims in federal court.
The plaintiffs claim the move exceeded Treasury’s authority and, as Coinbase put it in a blog post, used “a hammer instead of a scalpel,” causing financial harm. Tornado Cash users’ money is still locked on Tornado Cash, which is inconvenient for those who rely on the tools for privacy reasons. The court is being asked to remove Tornado Cash smart contracts from the list of US sanctions.
The plaintiffs make their case. It is the largest cryptocurrency exchange in terms of trading volume, and it has publicly advocated for crypto reforms in Washington while dealing with a slew of recent SEC investigations. The Securities and Exchange Commission recently requested information from Coinbase regarding the listing of cryptocurrencies that the SEC believes were unregistered securities. The SEC is also investigating its cryptocurrency rewards program, known as staking.
“We have advocated for regulatory reform throughout Washington, and we will continue to do so,” Grewal said. “We can continue to cooperate and partner with the agencies that are being challenged in this instance because the goal is not to call anyone’s good faith into question, but to ensure that the rule of law applies.”
