Original | Odaily Planet Daily (@OdailyChina)
Author | Nan Zhi (@Assassin_Malvo)
This morning, Coinbase's Chief Legal Officer Paul Grewal posted on X: 'Privacy rights have won. Today, the U.S. Fifth Circuit Court ruled that the U.S. Treasury's sanctions against Tornado Cash smart contracts are illegal. This is a historic victory for cryptocurrency and for 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 surged rapidly, rising from a low of $3.7 to a high of $43 within an hour.
What are the specific contents of the ruling, and what impact does it have on users, the protocol, and related assets? Odaily will interpret this in the article.
Interpretation of protocol impact
Story Background
In August 2022, the U.S. Treasury's Office of Foreign Assets Control (OFAC) included Tornado Cash in the sanctions list (SDN), after which multiple countries such as Germany, France, and South Korea conducted investigations, warnings, and sanctions against Tornado.
Regarding the OFAC sanctions in the United States, it can be simply summarized as:
Access is prohibited, including shutting down the frontend website and banning technical access;
Interaction is prohibited, preventing all entities, citizens, and other categories subject to U.S. jurisdiction from interacting with Tornado Cash, covering financial institutions, cryptocurrency platforms, wallet providers, etc.;
Flow of funds is prohibited, banning U.S. financial institutions and cryptocurrency exchanges from any inflow or outflow of funds related to Tornado Cash.
Asset freezing, all assets owned or controlled by Tornado Cash within the U.S., including virtual currencies, have been frozen.
Additionally, in May 2024, one of the founders of Tornado Cash, core developer, and 31-year-old Russian citizen Alexey Pertsev, was sentenced to 5 years and 4 months in prison in the Netherlands for laundering $2.2 billion on the cryptocurrency mixer platform.
In September this year, the criminal case against Tornado Cash developer Roman Storm will enter the trial process. The U.S. Department of Justice charged Storm and his colleague Roman Semenov with three counts, including conspiracy to commit money laundering, operating an unlicensed money transfer business, and violating the International Emergency Economic Powers Act, involving assisting the North Korean hacker group Lazarus Group in laundering over $1 billion.
Court ruling and impact
Coinbase Chief Legal Officer Paul Grewal stated, 'Tornado Cash will be removed from the sanctions list, and Americans will once again be allowed to use this privacy-protecting protocol. In other words, the government's overreach will not continue.'
Uniswap founder Hayden Adams pointed out that the key content in the ruling document is: "We believe that the immutable smart contracts of Tornado Cash (supporting privacy software code lines) are not 'property' of foreign nationals or entities, which means (1) they cannot be blocked under IEEPA, and (2) OFAC has overstepped the powers granted by Congress." (Detailed analysis can be found in 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 liquidity pool, Tornado remains the preferred mixer for hackers, and its TVL has been gradually recovering.
Although the frontend has been blocked, hackers call the on-chain smart contracts directly for mixing; the sanctions have little impact on these 'core users.' The author believes that the 'fundamentals' of TORN's revenue will not change significantly due to the ruling, and the main factors affecting token price fluctuations are changes in sentiment and confidence. Therefore, although TORN surged tenfold within an hour this morning, it subsequently dropped nearly 70% in the following two hours, suggesting that readers should focus on news and sentiment as the core basis for price judgment.
Will the trial against Roman have any impact?
After the Fifth Circuit Court ruling was released, a user consulted Consensys lawyer Bill Hughes asking, 'Will Roman be released?'
In response, Bill said: 'This is completely another matter. This does not mean that Tornado Cash is not a service, but rather that the immutable smart contracts contained in the software as part of the platform are not services. The U.S. Department of Justice stated that Roman operates a service that violates sanctions, illegally transfers funds, and facilitates money laundering, which does not change these charges.'
Core content of the ruling
This section explains in detail the logic and basis of the Fifth Circuit Court's ruling that the U.S. Treasury's sanctions against Tornado Cash smart contracts are illegal. Readers may choose to read selectively.
Tornado Cash is not a service
OFAC argues: 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 operation. Even according to the Treasury's definition, immutable smart contracts are merely lines of code; it is more accurate to say that they are tools used to provide services than to refer to them as 'services.'
Tornado Cash is not property
According to the International Emergency Economic Powers Act (IEEPA), the targets of OFAC sanctions must be 'property' or 'property in which a foreign person has an interest.'
The smart contracts of Tornado Cash are immutable, decentralized code that cannot be controlled by any economic entity. These smart contracts cannot be owned, and 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 the Tornado Cash pool smart contracts. Even under the OFAC sanctions regime, it is impossible to prevent North Korean hackers from extracting assets, so Tornado Cash does not belong to sanctioned property.
In the law, the government can only sanction objects that meet the definition of 'property' or 'service.' If something is neither property nor service, the sanctions lose their legal basis.
(Note: The court ruling document is detailed in the original text.)
