Original | Odaily Planet Daily (@OdailyChina)
Author | Nan Zhi (@Assassin_Malvo)
This morning, Coinbase Chief Legal Officer Paul Grewal posted on X, stating: 'Privacy rights win. Today, the U.S. Fifth Circuit Court ruled that the U.S. Treasury's sanctions against Tornado Cash's smart contracts are illegal. This is a historic victory for cryptocurrencies and all those concerned with 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 judgment, and what impact does it have on users, protocols, and related assets? Odaily will interpret it in this article.
Interpretation of the protocol's impact
Background of the story
In August 2022, the U.S. Treasury's Office of Foreign Assets Control (OFAC) added Tornado Cash to the sanctions list (SDN), after which several countries, including Germany, France, and South Korea, conducted investigations, warnings, and sanctions against Tornado.
With regard to U.S. OFAC sanctions, it can be simply summarized as:
Prohibition of access, including shutting down front-end websites and banning technical access;
Prohibition of interaction, banning all entities and citizens under U.S. jurisdiction from interacting with Tornado Cash, covering financial institutions, cryptocurrency platforms, wallet providers, etc.;
Prohibition of fund movement, banning U.S. financial institutions and cryptocurrency trading platforms from any inflow or outflow of funds related to Tornado Cash.
Freezing assets, all assets owned or controlled by Tornado Cash within the U.S., including virtual currencies, are frozen.
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 the trial process. The U.S. Department of Justice accuses Storm and his colleague Roman Semenov of three charges, including conspiracy to launder money, operating an unlicensed money transfer business, and violating the International Emergency Economic Powers Act, involving assisting the North Korean hacker organization 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 again be allowed to use this privacy-preserving protocol. In other words, the government overreach cannot continue.'
Uniswap founder Hayden Adams pointed out that the key content in the judgment document is: 'We believe that the immutable smart contracts of Tornado Cash (the software code lines that support privacy) 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, see the final section)
Impact on protocol revenue and tokens
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 steadily recovering.
Although the front end has been shut down, hackers directly interact with on-chain smart contracts for mixing, and sanctions have little impact on these 'core users.' The author believes that the 'revenue fundamentals' of TORN will not change significantly due to the ruling, and the main factors affecting token fluctuations are changes in sentiment and confidence. Therefore, although TORN surged tenfold within an hour this morning, it fell nearly 70% in the following two hours. Readers are advised to focus on news and sentiment as the core basis for price judgment going forward.
Does the trial of Roman have any impact?
After the Fifth Circuit Court's ruling was issued, some users consulted Consensys attorney Bill Hughes asking, 'Will Roman be released?'
In response, Bill said: 'This is completely another matter. It’s not that Tornado Cash is not a service, but that the immutable smart contracts contained within the software as part of the platform are not services. The U.S. Department of Justice states 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 judgment
This section specifically explains the logic and basis of the Fifth Circuit Court's ruling that the U.S. Treasury's sanctions against Tornado Cash's 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 operation. Even according to the Treasury's definition, immutable smart contracts are merely lines of code; rather than being a 'service', they are better described as tools used to provide a service.
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 national 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 the ability of anyone 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 OFAC's sanctions regime, it is impossible to prevent North Korean hackers from extracting assets, thus Tornado Cash does not constitute property that can be sanctioned.
In 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 can be found in the original text.)
