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Investors Sue Treasury Department for Blacklisting Crypto Platform

A group of cryptocurrency investors on Thursday sued the Treasury Department to block government sanctions that bar Americans from using 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 being funded by cryptocurrency exchange Coinbase, which: collided with the federal government over its increasingly strict regulation of digital assets. The suit alleges that the Treasury Department has 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 is blacklisting Tornado Cash to prevent hacking, money laundering and other crypto crimes. Industry groups reacted furiously, arguing that the crackdown would cut off access to a crucial privacy-preserving tool.

Tornado Cash, a so-called cryptocurrency mixer, is designed to make it harder for law enforcement and other observers to track crypto transactions. Every time two people exchange digital currencies, the transaction is recorded in a ledger called a blockchain, which anyone can analyze to track the movement of funds. But when people run their cryptocurrency through a mixer, money flows combine to obscure where the money is coming from.

That makes it a useful tool for criminals. According to the Treasury Department, a North Korean-backed hacking group used Tornado Cash to launder more than $455 million this year. In total, the agency has helped criminals launder $7 billion in virtual currencies, according to the ministry.

Crypto supporters claim that mixers are a neutral tool, often used by those who simply want to protect their privacy. A plaintiff in the lawsuit is a crypto investor who used Tornado Cash to send money in support of Ukraine’s war effort, hoping to preserve his anonymity and avoid retaliation by 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 series of “smart contracts” – bits of code that work independently of any entity.

That distinction is at the heart of the plaintiffs’ legal argument: they argue that the Treasury Department does not have the authority to restrict access to a software program.

“It’s important to respect the legal distinction between people and code,” said Paul Grewal, Coinbase’s Chief Legal Officer. “If that disrespect continues, 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.”