Author: Nancy, PANews

The crypto privacy sector is experiencing a critical turning point.

Recently, a U.S. court overturned the sanctions imposed on the Tornado Cash smart contract, which not only brought a significant market rebound for the platform's token TORN but also marked a milestone in defending the privacy rights of the crypto industry and preventing excessive government intervention. However, despite Tornado Cash's temporary legal victory, its developers still face criminal charges, and the platform must confront a series of market and regulatory challenges in the future.

OFAC Sanctions Ruled Overreaching, Developers Still Face Criminal Charges

In August 2022, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) announced sanctions against the mixer Tornado Cash, stating that the platform was used to launder over $7 billion worth of cryptocurrency. It required all U.S. individuals and entities to cease providing services related to the Tornado Cash protocol and prohibited interactions with Ethereum wallet addresses sanctioned due to the protocol. The U.S. regulatory crackdown not only led many platforms to suspend business dealings with Tornado Cash but also severely impacted the development of the crypto privacy sector.

However, the Tornado Cash lawsuit subsequently received support from institutions such as Coinbase and the crypto advocacy organization Coin Center, which claimed the sanctions were illegal. With funding support from Coinbase, six individuals, including Coinbase employees, filed a lawsuit against the decision to sanction Tornado Cash, and in January of this year, they obtained a rehearing from the U.S. Fifth Circuit Court. Coin Center also filed a lawsuit against the U.S. OFAC regarding the sanctions on Tornado Cash, alleging that the agency's sanctions exceeded its statutory authority, but that lawsuit was ultimately dismissed this month.

After a two-year legal battle, the appeal case regarding the sanctions on Tornado Cash finally received a new ruling. On November 26, the U.S. Federal Fifth Circuit Court of Appeals overturned the lower court's ruling, determining that the Office of Foreign Assets Control (OFAC) exceeded its authority when sanctioning the immutable smart contract of Tornado Cash.

The ruling document not only listed several legitimate reasons for plaintiffs using Tornado Cash, such as protecting privacy, avoiding cyberattacks, and anonymous donations, but also discussed whether smart contracts could be considered "property" or "entities," and whether OFAC had the authority to sanction them. Ultimately, the U.S. court concluded that while the Treasury has the authority to act against "property," the immutable nature of Tornado Cash's smart contracts means they cannot be controlled or owned, and therefore do not fit the traditional definition of "property" under the International Emergency Economic Powers Act (IEEPA). The legislative work regarding smart contracts should be led by Congress.

In fact, regarding OFAC's sanctions, former a16z executive Katie Haun's venture capital firm Haun Ventures previously pointed out that OFAC's blocking of open-source and self-executing software is overreaching on a statutory level. These software programs are neither the "property" of any foreign individual or entity nor owned by anyone. Regardless of how noble OFAC's intentions may be, it does not have the authority to impose such broad powers to target open-source software architectures. OFAC should focus its sanctions on malicious actors abusing open-source software rather than the tools themselves.

As a result, the Tornado Cash token TORN saw a surge early on November 27. According to CoinGecko data, TORN increased more than 9.6 times within 24 hours.

It is worth mentioning that this victory in the appeal does not mean that the developers of Tornado Cash will be released. Tornado Cash co-founder Roman Storm was charged this year with three counts, including money laundering and violating sanctions, with his trial postponed until April next year. His legal defense costs are estimated to reach $500,000 per month, although his legal defense fund has received donations from individuals like Vitalik; another developer, Alexey Pertsev, was sentenced to 64 months in prison by a Dutch court for money laundering this year and is appealing the guilty verdict while seeking to raise funds, remaining in custody during the trial period.

Legal Victory Boosts Confidence in Privacy Sector, Yet Faces Many Market Challenges

The significant legal victory for Tornado Cash undoubtedly injects new confidence into the crypto privacy field.

Coinbase Chief Legal Officer Paul Grewal stated, "This is a historic victory for cryptocurrency and all those who care about defending freedom. Now, these smart contracts must be removed from the sanctions list, and U.S. users will once again be allowed to use this privacy-protecting protocol. In other words, excessive government intervention will not stand."

ConsenSys General Counsel Matt Corva also regarded this as a huge victory, emphasizing that this ruling strikes again at the U.S. executive branch's exercise of power without updated and direct congressional authorization. "This marks another significant victory for the crypto industry and a victory for the rights to develop privacy technology in the U.S. This ruling sets an important precedent for future cases involving privacy-enhancing tools," stated the crypto lobbying group Blockchain Association.

From market data, Tornado Cash remains one of the more popular privacy platforms in the crypto space. Although Tornado Cash experienced a significant decline in deposits after being sanctioned, data from Flipside Crypto shows a notable recovery in deposits starting this year, with $1.9 billion received in deposits in the first half of this year, a substantial increase of about 50% compared to the total deposits for all of 2023.

However, challenges facing privacy projects like Tornado Cash are far from over. On one hand, Tornado Cash remains closely associated with numerous criminal activities, including frequent incidents this year where hackers used the platform for money laundering. For instance, in May, North Korean hackers used Tornado Cash to launder $150 million worth of stolen crypto assets, and Poloniex attackers transferred a total of 17,800 ETH to Tornado Cash; in July, UwUlend attackers transferred approximately $4.28 million worth of ETH into Tornado Cash; in September, WazirX hackers laundered over $160 million through Tornado Cash; in the same month, DeltaPrime hackers bridged all stolen funds (approximately $4.5 million) to the Ethereum network and deposited them into Tornado Cash; Indexed Finance attackers transferred over $4.5 million through Tornado Cash in October this year.

On the other hand, many platforms previously refused to engage in any financial interactions with Tornado Cash, and these institutions' policies need to be adjusted as the U.S. regulatory stance becomes clearer. For example, OKX founder Star publicly stated this year that any users engaging in direct financial interactions with Tornado Cash would face account closures. The New York Federal Reserve Bank also disclosed in a report this year that Ethereum builders largely cooperated with the sanctions against Tornado Cash. These actions indicate that even if the court rules OFAC's actions as overreaching, the use and popularization of privacy tools like Tornado Cash still face significant resistance from regulatory agencies and the market.

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