Written by: Liu Jiaolian
Last night (11.28 Teaching Chain Insider: All Good News) it was mentioned that the U.S. Fifth Circuit Court of Appeal ruled on Wednesday in the OFAC (U.S. Treasury Department's Office of Foreign Assets Control) sanctions against Tornado that "immutable smart contracts" on the blockchain cannot be sanctioned under current laws.
This is a bright moment for the spirit of the rule of law. This is a great victory of decentralization over traditional law.
To understand the significance of this ruling, we need to first understand: What is blockchain? What is a smart contract? What is an immutable smart contract? What is Tornado?
As is well known, blockchain is an automatic accounting system maintained independently by numerous unspecified subjects. These independent entities do not belong to the same company or organization, but operate individually, even scattered around the world, lacking central unified control. This highly loose form of collaboration between people is called 'decentralization.'
This form of collaboration is a product of human civilization evolving to a higher stage, starting with Satoshi Nakamoto's invention and launch of the Bitcoin system in 2008 and 2009. Before this, all large-scale human cooperation, from companies to nations, was centralized. In a centralized model, the underlying assurance for cooperation is 'violence,' or 'top-down coercion,' also known as 'legal harm rights.'
To see the small and know the great. Think about why you are always careful at work, fearing to offend your boss and facing repercussions? Essentially, it's because the boss, as your superior, has the legal right to harm you. Although the boss may not use this power against you, it hangs over your head like the sword of Damocles, keeping you on edge and anxious. Over time, you subconsciously start to look up to the boss's authority, comply with their directives, and even develop Stockholm syndrome, feeling grateful to the boss for providing you with a meal.
Why do we often see female subordinates in the workplace being somewhat flirtatious with their boss? Essentially, it is the comprehensive exploitation of superiors over subordinates from both a mental and physical perspective caused by the construction of centralized power.
Therefore, decentralization is another great liberation of the human spirit and even the body. In a truly decentralized system, there are no leaders, no authorities (or authoritarianism), no violence, no oppression, and no legal harm. Here, everything is based on your willingness, autonomy, and spontaneity. No one can force you to do anything. Here, you gain the highest level of freedom—the freedom to say 'no.'
The nation is the highest and largest collection of violence constructed by human civilization to date. Government departments are the tools through which the state exerts this powerful violence both externally and internally. Traditional law is the instruction manual for using these tools.
The United States is currently one of the most powerful countries on Earth. This means it possesses the strongest and fiercest violence in the world. OFAC, which stands for Office of Foreign Assets Control, is a division of the U.S. Treasury Department. Its responsibility is to enforce economic and trade sanctions related to U.S. national security and foreign policy. Its sanctions are primarily aimed at entities or individuals outside the U.S. that pose a threat to the U.S.
Tornado, known in English as Tornado Cash, is a set of smart contract codes running on the Ethereum blockchain. The function of these smart contract codes is to mix the digital currency deposited into one pot and then separate it into individual bowls for each person, which is called 'mixing coins.' Clearly, the 'mixing coins' function has a natural illegal use—money laundering.
So, what is a smart contract? A smart contract is essentially computer code, or computer instructions. Unlike traditional code that runs on ordinary computers or servers (clouds), smart contracts are specifically designed to run on the blockchain.
What’s different about running on the blockchain? We mentioned the characteristics of blockchain, which is decentralization. Once code is deployed on the blockchain, it cannot be modified (even if there is a bug, it cannot be recalled or corrected, you can only watch it fail), nor can it be restarted or interfered with arbitrarily, not even by the original developers and deployers—unless, technically speaking, the developers left a specific 'backdoor' code in the code to control the smart contract.
So, we now understand that if the blockchain used is genuinely decentralized (rather than the kind of pseudo-blockchain controlled by a company), then the smart contracts running on the blockchain can be divided into two categories:
One type is smart contracts with control backdoors. These are variable smart contracts.
The vast majority of smart contracts operated by a company have various backdoors. For example, the USDT smart contract has a 'backdoor' permission for Tether to arbitrarily freeze any address's assets. Almost all cross-chain bridges' smart contracts are so-called 'upgradeable smart contracts,' where the development team behind them has special 'backdoor' access to change contract logic at any time.
Another type is smart contracts without any control backdoors. These are what we initially referred to as 'immutable smart contracts.'
Examples in this area need to be carefully selected. To be honest, in the blockchain field, teams that are this 'particular' are extremely rare! Let's mention three examples:
The simplest example is WETH. This smart contract is immutable once deployed, and no one has the authority to intervene in the contract.
The second example is Uniswap. Although Uniswap has a company behind it, Uniswap Labs, this team is very meticulous. You see, every time it releases a new version, like V1, V2, V3, V4, it must redeploy because the open-source code shows that they have been implemented as immutable smart contracts that cannot be upgraded in place. As for the control over the fee switch, it is handed over to the governance contract, jointly controlled by the community, thus eliminating the last single point of control.
And the third example is the protagonist of today's story: Tornado (Tornado Cash).
In August 2022, the U.S. Treasury Department imposed sanctions on Tornado for allegedly assisting in over $7 billion of illegal transactions (including funds related to the North Korean 'Lazarus Group').
In August 2023, two developers of Tornado, Roman Storm and Roman Semenov, were charged with money laundering and violating sanctions. In May 2024, another developer, Alexey Pertsev, was convicted of laundering $1.2 billion and sentenced to 64 months in prison.
OFAC's so-called sanctions on smart contracts do not stop the code from running, but indiscriminately harm all those related to it—arresting developers and requiring all exchanges to freeze and prohibit all users from accessing funds from Tornado.
For example, it's like saying if a gangster uses a knife to harm someone, OFAC then arrests the knife manufacturers and publicly announces the confiscation of all knives held by people.
Thus, some users became angry. In a fit of rage, they filed a lawsuit against the U.S. Treasury Department.
In September 2023, Joseph Van Loon and other plaintiffs filed an appeal questioning the sanctions imposed on Tornado by the Office of Foreign Assets Control (OFAC).
The plaintiffs argue that OFAC's view of Tornado's immutable smart contracts as sanctionable 'property' exceeds the authority granted to it under the International Emergency Economic Powers Act (IEEPA). This appeal was filed after the district court ruled in support of OFAC's actions.
Fast forward to now. In November 2024, the Fifth Circuit Court ruled that the Treasury Department exceeded its authority in sanctioning Tornado's immutable smart contracts.
The Fifth Circuit Court believes that when smart contracts are immutable—meaning no entity can modify or control them—they cannot be classified as sanctionable 'property' under existing law.
The court pointed out that the immutable smart contracts involved in this case 'are not property because they cannot be owned.'
This ruling overturned the lower court's decision and was seen by industry authorities as a significant victory for privacy advocates and blockchain developers, providing clear legal guidance for developing similar products.
Of course, leaving a variable smart contract with a control backdoor still carries the risk of sanctions. OFAC can choose to sanction the person or company controlling the smart contract.
A small step for Tornado, a giant leap for humanity.
We gain a deeper understanding of the importance of 'giving up control' from this case.
Satoshi Nakamoto had long been clear-minded and prepared to relinquish all control over the Bitcoin system from the very beginning. He even gave up all real-world influence, choosing to become an eternal legend.
The Uniswap team, or its founder Hayden Adams, also deeply understands the core essence of decentralization, and thus made appropriate designs when constructing the system.
Even if I am no longer here, the system I delivered continues to operate.
If I am no longer here, each of you is me.
This is where the greatest value of decentralization lies.
References:
- [1] https://decrypt.co/293758/fifth-circuit-rules-ofac-overstepped-sanctioning-tornado-cashs-immutable-smart-contracts
