(Original title: Court rules OFAC overstepped: Tornado Cash case's technology and legal boundaries, author: ChainFeeds, Pan Zhixiong)

(For more information, see: Tornado Cash lawsuit gains advantage, U.S. court rules OFAC overstepped authority in sanctioning smart contracts)

Regardless of OFAC's designation of Tornado Cash, these immutable smart contracts will continue to operate.

Can immutable smart contracts be subject to sanctions? This is the core issue faced by the U.S. Fifth Circuit Court of Appeals in the Tornado Cash case.

Yesterday, the court ruled that the U.S. 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 severe sanctions on it.

However, the court's ruling pointed out that the immutable smart contracts of Tornado Cash do not meet the traditional legal definition of 'property.' These smart contracts are decentralized, self-executing, and uncontrollable code that cannot be owned or used exclusively. Therefore, placing them on the 'Specially Designated Nationals and Blocked Persons List' (SDN List) is considered to exceed the scope of legal authority.

The impact of this ruling extends far beyond the case itself. It not only involves the legality of blockchain privacy tools but also addresses major issues of technological neutrality and legal adaptability. The court's ruling provides direction for future legislation and regulation – the properties of technology itself need to be distinguished from the actions of malicious users, avoiding the over-expansion of administrative powers due to the neutrality of technology.

In fact, there are many details and content in the ruling document that are worth noting.

Who is the plaintiff?

These plaintiffs identify themselves as users of Tornado Cash, and they are also users of Ethereum and the crypto ecosystem. They come from security audit teams, Coinbase, client developers, hardware wallets, etc., and have the support of the Coinbase legal team. They are:

1. Joseph Van Loon (Auditware, former Apple)

2. Tyler Almeida (Coinbase)

3. Alexander Fisher (Angel Investor)

4. Preston Van Loon (Ethereum Core Developer and Offchain Labs / Arbitrum)

5. Kevin Vitale (GridPlus)

6. Nate Welch (former zkSync, Coinbase)

Who is the defendant?

1. U.S. Department of the Treasury and Treasury Secretary Janet Yellen

2. Office of Foreign Assets Control (OFAC) and OFAC Director Andrea M. Gacki

Why did the plaintiffs file a lawsuit?

The plaintiffs sued the defendants, questioning their authority in law, for classifying Tornado Cash's immutable smart contracts as 'property' and imposing sanctions, violating the International Emergency Economic Powers Act (IEEPA) and the Administrative Procedure Act (APA).

The plaintiffs argue that these contracts are decentralized code that operates autonomously and cannot be controlled or owned, and thus 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 the federal appellate court. Above it is the Supreme Court of the United States, which is at the top of the entire federal judicial system and is the final arbiter. Only a few cases can enter the Supreme Court through appeals or special permissions (such as writs of certiorari).

What was the outcome of the court ruling?

The court ruled that the defendant (OFAC) violated the International Emergency Economic Powers Act (IEEPA) by imposing sanctions on Tornado Cash because 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 classified as subjects of sanctions. At the same time, the court pointed out that although technology may be abused, administrative agencies do not have the authority to expand the scope of sanctions beyond legal provisions. Ultimately, the court overturned the sanction decision and called on the legislature to improve the legal gaps regarding emerging technologies.

Why did the plaintiffs initiate a lawsuit against Tornado Cash?

These six plaintiffs, while not developers of Tornado Cash, 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 Ukraine through Tornado Cash, fearing retaliation from Russian hacker organizations if the transaction was traced. Kevin Vitale turned to Tornado Cash to protect his privacy after discovering that someone associated his cryptocurrency activities with his actual address. Several others shared similar statements.

Immutable is the core keyword; 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 recognized that this uniqueness of decentralized technology poses unique challenges to the current legal system.

The final ruling of the court is:

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 the ordinary sense, nor under OFAC's definitions, we find that OFAC exceeded its statutory authority.

It was also added that

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's definition of immutable smart contracts is:

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.

Immutable smart contracts cannot be changed or removed from the blockchain. It is important to note that mutable smart contracts 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 hacking organization Lazarus Group stole nearly $1 billion in cryptocurrency through hacking and needed to use mixers to hide the source of funds to complete money laundering. Therefore, OFAC accused Tornado Cash's mixing functionality of being used for money laundering, believing that Lazarus Group laundered over 65% through mixers in 2021, with Tornado Cash being one of the main tools.

Thus, Tornado Cash is accused of having indirect links to the money laundering activities of the Lazarus Group and is therefore included in the sanctions list.

The court also acknowledged that although the Lazarus Group used Tornado Cash, this should not serve as a legitimate basis for sanctioning the entire protocol. Because immutable smart contracts do not belong to the traditional definitions of 'property' or 'service,' the entire protocol should not be sanctioned just because of the misuse by certain users (such as the Lazarus Group).

Therefore, OFAC's actions exceeded its legal authority. The court called for solutions through updating the law, rather than expanding the current sanctions framework.

The IEEPA was legislated in 1977, long before the modern internet.

Previously, the main legal basis for OFAC's sanctions on Tornado Cash was the International Emergency Economic Powers Act (IEEPA), but the court also stated that 'the IEEPA was legislated in 1977, long before the invention of the modern internet.'

The IEEPA grants the U.S. President the power to impose economic sanctions on foreign 'property' when national security, economic, or foreign policy is under 'unusual and extraordinary threat.' OFAC considers Tornado Cash to be an 'entity' and lists its smart contracts as tools related to cybercrime organizations such as North Korea's Lazarus Group.

But the court emphasized that it is Congress's responsibility to amend laws to address the challenges posed by new technologies, not for the judiciary to fill gaps by broadening legal interpretations. The court rejected the Treasury's attempt to expand administrative powers through judicial processes.

Finally

The significance of this ruling lies not only in the legality of the privacy tools behind Tornado Cash but also in setting clear legal boundaries for the development of the entire blockchain industry and 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 attractive technology, and these two sentences in the ruling document explain the uniqueness of this 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 OFAC's designation of Tornado Cash, 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.”

This article interprets the Tornado Cash case: the court's key determinations on smart contracts will change the regulatory perspective on DeFi, first appearing in Chain News ABMedia.