Tornado Cash sanctions, Coinbase has funded a lawsuit against the Treasury Department.

Coinbase is covering the bill for a lawsuit filed against the Treasury Department by customers of Tornado Cash, a recently sanctioned cryptocurrency business.

Coinbase employees and other users of the mixing service that was blacklisted by the Office of Foreign Assets Control (OFAC) in August are among the six plaintiffs.

Mixing services like as Tornado Cash are utilized to obscure crypto transactions, which, despite being anonymous, are highly traceable. The Treasury Department contended that North Korean hackers and other criminal actors exploited this site to launder more than $7 billion worth of digital currency over the past three years.

In other instances, though, mixing services are employed for genuine reasons of privacy. One plaintiff, a senior security risk analyst at Coinbase, used the program to anonymize payments to Ukraine because he feared that Russian hacker gangs would target his address. Another had concerns about his family’s security.

According to the lawsuit, "each defendant is a citizen of the United States who only wishes to participate in authorized conduct in private."

Treasury's decision to ban open source software as opposed to a company or person was unprecedented. Crypto aficionados have suggested that the move was an overreach, that it establishes a new legal precedent, and that it could have a negative influence on the technology sector.

Coinbase's chief legal officer, Paul Grewal, told CNBC, "We recognized this as a much wider problem." "It establishes a hazardous precedent; if this code may be labeled without any limitations imposed by legislation, then any technology, instrument, or system is fair game."

Grewal, a former deputy general counsel at Facebook, stated that it could inhibit innovation. He compared the Tornado Cash scenario to highway police pursuing armed bandits. To apprehend the perpetrators, "we would not prohibit entire use of that highway." Grewal said that this was the first time that Coinbase had paid for an outside lawsuit. The company plans to pay for the plaintiffs' lawyers and other costs related to pursuing the claims in federal court.

The lawsuit filed on Thursday says that the move went a step too far and used "a hammer instead of a scalpel," which is how Coinbase put it in a blog post. The plaintiffs say it hurt them financially because their money is still locked on Tornado Cash. They also say it hurt people who used the tools to protect their privacy. In the case, the U.S. wants the Court to take Tornado Cash smart contracts off the list of things that can't be done.

Coinbase is the biggest cryptocurrency exchange in the U.S. in terms of trading volume, and it has been pushing for crypto reforms in Washington while dealing with a series of recent SEC investigations. The Securities and Exchange Commission recently asked Coinbase for information about the listing of cryptocurrencies that the agency thinks may have been unregistered securities. The SEC is also taking a look at its staking program, which is a way to get crypto rewards.

Grewal said, "We have pushed for regulatory reform all over Washington, and we will keep doing that." "We can continue to work with and partner with the agencies that are being challenged in this case because it's not about questioning anyone's good faith. It's about making sure that the rule of law is followed."