The Fifth Circuit Court of Appeals ruled yesterday that the Treasury Department's OFAC sanctions against the immutable smart contracts of Tornado Cash were overreaching, as they do not constitute 'property' belonging to foreign persons or entities. The court found that these contracts cannot be owned, and the sanctions cannot prevent the sanctioned parties from using them, potentially impacting innocent users. (Background: Tornado Cash faces a trial in the U.S. with a 'maximum sentence of 45 years'; is writing code considered money laundering crime?) (Additional background: The founder of the mixer Tornado Cash may face 64 months in prison! Dutch prosecutors: he created a global money laundering haven) The Ethereum mixer protocol Tornado Cash was sanctioned by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) in August 2022 for allegedly being used by North Korean hackers to launder over $1 billion. As a result, Americans are no longer allowed to use this privacy-protecting protocol, and its co-founders and developers Alexey Pertsev, Roman Storm, and Roman Semenov have been charged with money laundering and other offenses. However, there has been a significant reversal in the case regarding the Treasury's inclusion of Tornado Cash on the sanctions list. In the legal opinion issued yesterday (the 26th), a three-judge panel of the Fifth Circuit Court of Appeals ruled that OFAC overstepped its authority in sanctioning the immutable smart contracts of Tornado Cash (software code providing privacy features) because they are not 'property' belonging to foreign persons or entities. This means: (1) These contracts cannot be frozen or restricted under the International Emergency Economic Powers Act (IEEPA), and (2) OFAC has exceeded the scope of authority granted by Congress. Note: IEEPA is a U.S. federal law enacted in 1977 that grants the president the power to regulate and prohibit certain financial transactions. Furthermore, Bill Hughes, the general counsel of Consensys, pointed out the core reasons for the court ruling that OFAC overstepped its authority, which include: 1) Immutable smart contracts are not property. The court determined that these smart contracts cannot be 'owned' because the participating parties have removed any possibility of anyone updating, deleting, or controlling the code through a 'trusted setup ceremony.' Because these smart contracts cannot be owned, they cannot be considered property that can be sanctioned even according to OFAC's regulations. Additionally, OFAC's practice of viewing 'contracts' and 'services' as property does not apply here, as these smart contracts are neither contracts nor services. Regarding 'services,' immutable smart contracts do not involve any human input; even according to OFAC's definition, these smart contracts are merely code, more akin to 'tools' used to provide services rather than the services themselves. 2) Sanctions cannot prevent contract operation. Even if sanctioned, these immutable smart contracts continue to function, and anyone can still use them, and it is impossible to exclude others from using them, including the sanctioned targets (such as North Korean hackers). 3) Innocent users may be affected. Blockchain technology allows for peer-to-peer asset transfers without the consent of the recipient. Some users may inadvertently receive digital assets through Tornado Cash and thus bear legal liability. Bill Hughes summarized: In summary, according to federal law, these contracts cannot be blocked. More precisely, they cannot be considered part of OFAC's discretionary powers and thus be blocked. However, Bill Hughes also clarified that this does not mean that other aspects of Tornado Cash are completely outside the jurisdiction of the Treasury or OFAC; the focus of this discussion is limited to the immutable smart contracts without managed private keys. Coinbase's General Counsel: Privacy wins! The outcome of this appellate ruling is undoubtedly a historic victory for cryptocurrency and all who care about defending liberty. Coinbase's General Counsel Paul Grewal excitedly tweeted: Privacy wins! These smart contracts must now be removed from the sanctions list, and Americans will again be allowed to use such privacy-protecting protocols. Paul Grewal added that no one wants criminals to use crypto protocols, but completely preventing open-source technology because of a small number of bad actors is not authorized by Congress. The Treasury's overreach is untenable. Privacy wins. Today the Fifth Circuit held that @USTreasury’s sanctions against Tornado Cash smart contracts are unlawful. This is a historic win for crypto and all who cares about defending liberty. @coinbase is proud to have helped lead this important challenge. 1/6 — paulgrewal.eth (@iampaulgrewal) November 26, 2024 $TORN surges nearly 10 times. As a result, Tornado Cash's token $TORN experienced a surge. According to CoinGecko data, $TORN skyrocketed from $3.61 this morning to $34.98 within just two hours, soaring over 9 times and reaching a new high since May 2022. Before the deadline, it reported $21.19, up 497.1% in nearly 24 hours. Will the developers' charges be dropped? However, does this ruling mean that the charges faced by the three developers will be dropped? Bill Hughes stated that this is a completely different situation, noting: This does not mean that Tornado Cash as a whole is not a service, but rather that the immutable smart contracts within the platform's software suite do not constitute a service. The Department of Justice (DOJ) stated that Roman operated a service that violated sanctions, illegally transferred funds, and assisted in money laundering, which does not change these charges. Further reading: Tornado Cash faces trial in the U.S. with a 'maximum sentence of 45 years'; is writing code considered money laundering crime? The origin of the appeal. This appeal was brought by six Tornado Cash users, led by Joseph Van Loon, and supported by Coinbase. They filed a lawsuit against the U.S. Treasury in August 2022, questioning the legality of including 44 Tornado Cash smart contract addresses on the Specially Designated Nationals (SDN) list. Subsequently, the cryptocurrency advocacy organization Coin Center also filed a similar lawsuit in October of the same year. However, nearly a year later, a Texas federal court judge supported the U.S. Treasury's position, determining that Tornado Cash is an entity that can be designated under OFAC regulations. The plaintiffs appealed this ruling, ultimately leading to yesterday's latest...