Original | Odaily Planet Daily (@OdailyChina)

Author | Nan Zhi (@Assassin_Malvo)

This morning, Coinbase Chief Legal Officer Paul Grewal posted on X, stating: "Privacy rights have won. Today, the U.S. Fifth Circuit Court ruled that the U.S. Treasury's sanctions against the Tornado Cash smart contract are illegal. This is a historic victory for cryptocurrency and for all who care about defending freedom." Uniswap founder called it "immutable smart contracts defeating the Treasury in court."

Following the news, the Tornado Cash protocol token TORN quickly surged, rising from a low of $3.7 to a high of $43 within an hour.

What are the specifics of the ruling, and what impact does it have on users, protocols, and related assets? Odaily will interpret this in the article.

Interpretation of Protocol Impact

Background Story

In August 2022, the U.S. Treasury's Office of Foreign Assets Control (OFAC) added Tornado Cash to its sanctions list (SDN), after which Germany, France, South Korea and several other countries conducted investigations, warnings, and sanctions against Tornado.

In terms of the U.S. OFAC sanctions, it can be summarized as follows:

• Access prohibition, including shutting down front-end websites and banning technical access;

• Interaction prohibition, banning all entities and citizens under U.S. jurisdiction from interacting with Tornado Cash, covering financial institutions, cryptocurrency platforms, wallet providers, etc.;

• Fund flow prohibition, prohibiting U.S. financial institutions and cryptocurrency trading platforms from any inflow or outflow of funds related to Tornado Cash.

• Asset freezing, all assets owned or controlled by Tornado Cash within the U.S., including virtual currencies, have been frozen.

Additionally, in May 2024, one of the founders and core developers of Tornado Cash, 31-year-old Russian citizen Alexey Pertsev, was sentenced to 5 years and 4 months in prison in the Netherlands for laundering $2.2 billion on a cryptocurrency mixer platform.

In September of this year, the criminal case of Tornado Cash developer Roman Storm will enter trial proceedings. The U.S. Department of Justice accused Storm and his colleague Roman Semenov of three charges, including conspiracy to commit money laundering, operating an unlicensed money transfer business, and violating the International Emergency Economic Powers Act, with charges involving assisting the North Korean hacking group Lazarus Group in laundering over $1 billion.

Court Ruling and Impact

Coinbase Chief Legal Officer Paul Grewal stated: "Tornado Cash will be removed from the sanctions list, Americans will once again be allowed to use this privacy-preserving protocol. In other words, the government's overreach will not continue."

Uniswap founder Hayden Adams pointed out that a key point in the ruling document is: "We believe that the immutable smart contracts of Tornado Cash (the lines of software code that support privacy) are not 'property' of foreign nationals or entities, which means (1) they cannot be blocked under IEEPA, and (2) OFAC has exceeded the powers granted by Congress." (For a detailed analysis, see the last section)

Protocol Revenue and Token Impact

After being sanctioned by OFAC in 2022, Tornado Cash's TVL plummeted, but due to historical accumulation and the depth of the liquidity pool, Tornado remains the preferred mixer for hackers, with its TVL gradually recovering.

Although the front end was banned, hackers directly call on-chain smart contracts for mixing, so the sanctions have little impact on these "core users." The author believes that the "revenue fundamentals" of TORN will not undergo significant changes due to the ruling, and the main factors affecting the token's rise and fall are changes in sentiment and confidence. Therefore, although TORN surged tenfold within an hour this morning, it subsequently fell nearly 70% in the following two hours, suggesting that readers should focus on news and sentiment as the core basis for price judgment.

Will it affect Roman's trial?

After the Fifth Circuit Court's ruling was released, a user consulted Consensys lawyer Bill Hughes, asking "Will Roman be released?"

In response, Bill stated: "This is entirely a different matter. This does not mean that Tornado Cash is not a service, but rather that the immutable smart contracts contained within the software as part of the platform are not a service. The U.S. Department of Justice states that Roman operated a service that violated sanctions, illegally transferred funds, and facilitated money laundering, which does not change these charges."

Core Content of the Ruling

This section specifically explains the logic and basis of the Fifth Circuit Court's ruling that the U.S. Treasury's sanctions against the Tornado Cash smart contract are illegal. Readers may choose to read selectively.

Tornado Cash is Not a Service

OFAC argues: Smart contracts are essentially a service because they can be used by users to perform specific types of operations (such as anonymous transactions).

Court's view: Immutable smart contracts do not require human operation. Even according to the Treasury's definition, immutable smart contracts are merely lines of code; rather than being a 'service,' they are better described as tools used to provide a service.

Tornado Cash is Not Property

According to the International Emergency Economic Powers Act (IEEPA), OFAC's sanctions targets must be "property" or "property" in which a foreign national has an interest.

The smart contracts of Tornado Cash are immutable, decentralized code that no economic entity can control; these smart contracts cannot be owned. Over a thousand volunteers participated in a trusted setup ceremony to "irreversibly remove anyone's ability to update, remove, or control these lines of code." Therefore, no one can exclude others from using the Tornado Cash pool smart contracts. Even under the OFAC sanctions regime, it is impossible to prevent North Korean hackers from extracting assets, so Tornado Cash does not belong to property that can be sanctioned.

In law, the government can only sanction entities that meet the definitions of "property" or "service." If something is neither property nor service, the sanctions lose their legal basis.

_(Note: For the court ruling document, see the _original text)

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