Author: Nan Zhi, Odaily Planet Daily
This morning, Coinbase Chief Legal Officer Paul Grewal posted on X stating: 'Privacy rights have won. Today, the Fifth Circuit Court of the United States ruled that the U.S. Treasury's sanctions on Tornado Cash smart contracts are illegal. This is a historic victory for cryptocurrency and all who care about defending freedom.' The Uniswap founder called it 'immutable smart contracts defeating the Treasury in court.'
After the news broke, 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 specific contents of the judgment, and what impacts will it have on users, protocols, and related assets? Odaily will interpret this in the article.
Interpretation of protocol impact
Story background
In August 2022, the U.S. Treasury Office of Foreign Assets Control (OFAC) added Tornado Cash to the sanctions list (SDN), after which multiple countries including Germany, France, and South Korea conducted investigations, warnings, and sanctions against Tornado.
Regarding the U.S. OFAC sanctions, it can be simply summarized as:
Access was banned, including shutting down front-end websites and prohibiting technical access;
Interactions were prohibited, banning all entities and citizens subject to U.S. jurisdiction from interacting with Tornado Cash, covering financial institutions, cryptocurrency platforms, wallet providers, etc.;
Capital flows were prohibited, preventing U.S. financial institutions and cryptocurrency trading platforms from any inflow or outflow of funds related to Tornado Cash.
Assets were frozen, including virtual currencies and other assets owned or controlled by Tornado Cash within the United States.
In addition, in May 2024, Alexey Pertsev, one of the founders and core developers of Tornado Cash, a 31-year-old Russian citizen, 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 this year, the criminal case of Roman Storm, one of the developers of Tornado Cash, will enter trial proceedings. The U.S. Department of Justice accuses 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 hacker organization Lazarus Group in laundering over $1 billion.
Court ruling and its impact
Coinbase Chief Legal Officer Paul Grewal stated: 'Tornado Cash will be removed from the sanctions list, and Americans will be allowed to use this privacy protection protocol again. In other words, the government's overreach will no longer continue.'
Uniswap founder Hayden Adams pointed out that the key content in the ruling document is: 'We believe that Tornado Cash's immutable smart contracts (supporting privacy software code lines) are not the '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 specific analysis, please refer to 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 fund pool, Tornado remains the preferred mixer for hackers, and its TVL continues to recover gradually.
Although the front end is banned, hackers directly call on-chain smart contracts to mix coins, and whether sanctions are applied has little effect on these 'core users.' The author believes that TORN's 'income fundamentals' will not undergo significant changes due to the ruling; the main influences on token price fluctuations are emotional and confidence changes. Therefore, although TORN surged tenfold within one hour this morning, it dropped nearly 70% in the following two hours. Readers are advised to focus on news and sentiment as the core judgment basis for price.
Will it affect Roman's trial?
After the Fifth Circuit Court's ruling was published, a user consulted Consensys lawyer Bill Hughes asking, 'Will Roman be released?'
Bill's response was: 'This is completely another matter. This does not mean that Tornado Cash is not a service, but rather that the immutable smart contracts embedded in the software as part of the platform are not a service. The U.S. Department of Justice claims 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 judgment
This section specifically explains the logic and basis of the Fifth Circuit Court's ruling that the U.S. Treasury's sanctions on Tornado Cash smart contracts are illegal. Readers may choose to read selectively.
Tornado Cash is not a service
OFAC claims: 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 intervention. Even according to the Treasury's definition, immutable smart contracts are merely lines of code; rather than being a 'service,' they are more accurately 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.
Tornado Cash's smart contracts 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 Tornado Cash's pool smart contracts. Even under the OFAC sanction regime, North Korean hackers cannot be prevented from withdrawing assets, thus Tornado Cash does not belong to sanctioned property.
In law, the government can only sanction entities that meet the definition of 'property' or 'service.' If something is neither property nor service, sanctions lose their legal basis.
(Note: For details of the court ruling document, please refer to the original text.)