Regardless of whether OFAC lists Tornado Cash on the sanctions list, these immutable smart contracts will continue to operate.
Written by: ZHIXIONG PAN
Can immutable smart contracts be subject to sanctions? This is the core question faced by the U.S. Fifth Circuit Court of Appeals in the Tornado Cash case.
Yesterday, the court ruled that the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) overstepped its authority in sanctioning Tornado Cash. This ruling is not only a victory for the plaintiffs but also sparks discussions about technological neutrality and legal boundaries.
The rise of blockchain technology has brought about a revolution in privacy and decentralization, but it also comes with regulatory challenges. When the privacy tool Tornado Cash became the focus of money laundering controversies, the U.S. Treasury imposed strict sanctions on it.
However, the court's ruling pointed out that Tornado Cash's immutable smart contracts do not fit the traditional legal definition of "property." These smart contracts are decentralized, self-executing, and uncontrollable code that cannot be owned or used exclusively. Therefore, the act of listing them on the Specially Designated Nationals and Blocked Persons List (SDN List) was deemed to exceed the legal authority.
The impact of this ruling goes far beyond the case itself. It not only involves the legality of blockchain privacy tools but also addresses significant issues of technological neutrality and legal adaptability. The court's decision points the way for future legislation and regulation—distinguishing the attributes of technology itself from the actions of malicious users, to avoid overextending the powers of administrative agencies due to the neutrality of technology.
In fact, the ruling document contains many details and content worth noting.
Who are the plaintiffs?
These plaintiffs claim to be users of Tornado Cash, but they are also users of Ethereum and the crypto ecosystem. They come from security audit teams, Coinbase, client developers, hardware wallets, etc., and are supported by Coinbase's legal team. They are:
- Joseph Van Loon (Auditware, former Apple)
- Tyler Almeida (Coinbase)
- Alexander Fisher (Angel Investor)
- Preston Van Loon (Ethereum Core Developer and Offchain Labs / Arbitrum)
- Kevin Vitale (GridPlus)
- Nate Welch (former zkSync, Coinbase)
Who are the defendants?
- The U.S. Department of the Treasury and U.S. Treasury Secretary Janet Yellen
- The Office of Foreign Assets Control (OFAC) and OFAC Director Andrea M. Gacki
Why did the plaintiffs file a lawsuit?
The plaintiffs filed a lawsuit against the defendants, questioning their authority in designating Tornado Cash's immutable smart contracts as "property" and imposing sanctions, which they argue violates the International Emergency Economic Powers Act (IEEPA) and the Administrative Procedure Act (APA).
The plaintiffs believe that these contracts are self-operating decentralized code that cannot be controlled or owned, and therefore should not be subject to sanctions.
Which court made the ruling?
The United States Court of Appeals for the Fifth Circuit is equivalent to an intermediate court, which is a federal appellate court. Above it is the Supreme Court of the United States, which is at the top of the federal judicial system and is the final adjudicating body. Only a few cases can reach the Supreme Court through appeal or special permission (such as a writ of certiorari).
What was the court's ruling?
The court ruled that the defendants (OFAC) violated the International Emergency Economic Powers Act (IEEPA) in sanctioning Tornado Cash, as immutable smart contracts do not meet the definition of "property."
The court found that these smart contracts are decentralized, self-executing, and uncontrollable code, and should not be subject to sanctions. At the same time, the court pointed out that while technology may be misused, administrative agencies do not have the authority to expand the scope of sanctions beyond what the law prescribes. Ultimately, the court overturned the sanction decision and called for legislative bodies to address the legal gaps regarding emerging technologies.
Why did the plaintiffs help initiate the lawsuit against Tornado Cash?
Although these six plaintiffs are not developers of Tornado Cash, they all stated that they are users of Tornado Cash and expressed the need for Tornado Cash to enhance privacy for legitimate purposes.
For example, Tyler Almeida anonymously donated to support Ukraine through Tornado Cash, fearing that if the transaction were tracked, he might face retaliation from Russian hacker groups. Kevin Vitale turned to Tornado Cash to protect his privacy after discovering that someone had linked his cryptocurrency activities to his actual address. The other plaintiffs made similar statements.
Immutable is the key term; how is it defined?
In this case, there was much discussion, definition, and summary surrounding the term immutable, which effectively recognized the uniqueness of decentralized systems and smart contracts as new technologies. The court also acknowledged that this uniqueness of decentralized technology presents unique challenges to the current legal system.
The court's final ruling was:
Because these immutable smart contracts are not ‘property’ under the word’s common, ordinary meaning or under OFAC definitions, we hold that OFAC exceeded its statutory authority.
Because these immutable smart contracts do not constitute "property" in either the common, ordinary sense or under OFAC's definitions, we find that OFAC exceeded its statutory authority.
It also added,
The immutable smart contracts at issue in this appeal are not property because they are not capable of being owned.
And as a result, no one can ‘exclude’ anyone from using the Tornado Cash pool smart contracts.
The immutable smart contracts involved in this case are not property because they cannot be owned.
Therefore, no one can "exclude" others from using the Tornado Cash smart contracts.
The court defined immutable smart contracts as:
A mutable smart contract is one which is managed by some party or group and may be changed.
An immutable smart contract, on the other hand, cannot be altered or removed from the blockchain. Importantly, a mutable contract may be altered to become immutable. But that is an irreversible step; once a smart contract becomes immutable, no one can reclaim control over it.
A mutable smart contract is a contract managed by certain individuals or groups and can be changed.
An immutable smart contract, however, cannot be changed or removed from the blockchain. It is important to note that a mutable smart contract can be changed to an immutable state. But this is an irreversible process; once a smart contract becomes immutable, no one can regain control over it.
But what if hackers are really using Tornado Cash for money laundering? There is currently no solution.
The North Korean hacker group Lazarus Group stole nearly $1 billion in cryptocurrency through hacking and needed to use mixers to hide the source of the funds to complete the money laundering. Therefore, OFAC accused Tornado Cash's mixing function of being used for money laundering, claiming that Lazarus Group laundered over 65% of their funds through mixers in 2021, with Tornado Cash being one of the main tools.
Thus, Tornado Cash was indirectly linked to the money laundering activities of Lazarus Group and was placed on the sanctions list.
The court also acknowledged that while Lazarus Group used Tornado Cash, this should not serve as a legitimate basis for sanctioning the entire protocol. Because immutable smart contracts do not fall under the traditional definition of "property" or "service," the entire protocol cannot be sanctioned due to the misuse by certain users (such as Lazarus Group).
Therefore, OFAC's actions exceeded the legal authority. The court called for addressing the issue through updating the law rather than expanding the current sanctions framework.
The IEEPA was legislated in 1977, long before the modern internet
Previously, OFAC's main legal basis for sanctioning Tornado Cash was the International Emergency Economic Powers Act (IEEPA), but the court also stated, "The IEEPA was legislated in 1977, long before the invention of the modern internet."
IEEPA grants the U.S. President the power to impose economic sanctions on foreign-related "property" when national security, economic, or foreign policy is under "unusual and extraordinary threat." OFAC views Tornado Cash as an "entity" and categorizes its smart contracts as tools associated with cybercriminal organizations like North Korea's Lazarus Group.
However, the court emphasized that it is Congress's responsibility to amend laws to address the challenges posed by new technologies, rather than the judiciary expanding legal interpretations to fill gaps. The court rejected the Treasury's attempt to broaden administrative authority through judicial processes.
In conclusion
The significance of this ruling lies not only in the legality of the privacy tools behind Tornado Cash but also in delineating clear legal boundaries for the entire blockchain industry and the development of decentralized technologies. The uniqueness of immutable smart contracts was deeply discussed in this case, and the court's ruling provides important judicial support for the legitimate use of similar technologies in the future.
At the same time, this also presents new challenges for regulators: how to effectively curb potential illegal uses while protecting technological innovation and privacy.
After all, this is a very compelling technology, and these two sentences in the ruling document illustrate the uniqueness of the technology well:
Simply put, regardless of OFAC’s designation of Tornado Cash, the immutable smart contracts continue operating.
Even with the sanctions in place, "those immutable smart contracts remain accessible to anyone with an internet connection."
Simply put, regardless of whether OFAC lists Tornado Cash on the sanctions list, these immutable smart contracts will continue to operate.
Even with the sanctions in effect, "these immutable smart contracts remain open to anyone with an internet connection."
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