Author: Nancy, PANews
The cryptocurrency privacy sector welcomes a key turning point.
Recently, the U.S. court overturned the ruling that sanctioned Tornado Cash's smart contract, not only leading to a significant market rebound for the platform's token TORN but also marking a milestone in defending privacy rights in the crypto industry and preventing excessive government intervention. However, despite Tornado Cash winning a temporary legal victory, its developers still face criminal charges, and the platform will continue to confront a series of market and regulatory challenges in the future.
OFAC's sanctions ruled as overreach, developers still face criminal charges
In August 2022, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) announced sanctions against the mixer Tornado Cash, stating that the platform was used to launder over $7 billion worth of cryptocurrency and required all U.S. individuals and entities to cease providing services related to the Tornado Cash protocol, as well as prohibiting interactions with Ethereum wallet addresses that were sanctioned due to this protocol. The crackdown by U.S. regulators not only led many platforms to suspend business dealings with Tornado Cash but also severely impacted the development of the cryptocurrency privacy sector.
However, the Tornado Cash lawsuit subsequently received support from institutions such as Coinbase and the crypto advocacy organization Coin Center, which claimed that the sanctions were illegal. Among them, with funding support from Coinbase, six individuals, including Coinbase employees, filed a lawsuit challenging the decision to place Tornado Cash on the sanctions list and obtained a rehearing from the U.S. Fifth Circuit Court in January this year. Coin Center also filed a lawsuit against U.S. OFAC regarding the sanctions on Tornado Cash, accusing the agency of exceeding its legal authority, but that lawsuit was ultimately dismissed this month.
After a two-year legal battle, the appeal case against the sanctions on Tornado Cash finally saw a new ruling. On November 26, the U.S. Court of Appeals for the Fifth Circuit overturned the lower court's decision, ruling that the Office of Foreign Assets Control (OFAC) exceeded its authority when sanctioning the immutable smart contracts of Tornado Cash.
In the ruling document, multiple plaintiffs' legitimate reasons for using Tornado Cash, such as protecting privacy, avoiding cyber attacks, and anonymous donations, were not only listed, but there was also discussion on whether smart contracts could be considered "property" or "entities," and whether OFAC had the authority to sanction them. Ultimately, the U.S. court found that although the Treasury Department has the authority to act on "property," Tornado Cash's smart contracts are immutable, uncontrollable, and unownable, and therefore do not meet the traditional definition of "property" according to the International Emergency Economic Powers Act (IEEPA), and the legislative work regarding smart contracts should be led by Congress.
In fact, regarding OFAC's sanctions, former a16z executive Katie Haun's venture capital firm Haun Ventures previously pointed out that OFAC's actions to block open-source and self-executing software are legally overreaching; these software are neither the "property" of any foreign individual or entity nor belong to anyone. Regardless of how noble OFAC's intentions may be, it has not been granted such broad powers to target open-source software architecture. OFAC should focus its sanctions on malicious actors abusing open-source software, rather than the tools themselves.
As a result, Tornado Cash's token TORN saw a surge early on November 27. CoinGecko data shows that TORN increased more than 9.6 times within 24 hours.
It is worth mentioning that this victory in the appeal does not mean that the developers of Tornado Cash will be released. Among them, Tornado Cash co-founder Roman Storm was charged this year with money laundering and violating sanctions, and his trial has been postponed until April next year, with defense costs estimated to reach $500,000 per month; however, his legal defense fund has received donations from Vitalik and others. Another developer, Alexey Pertsev, was sentenced to 64 months in prison by a Dutch court this year for money laundering and is currently appealing the guilty verdict while seeking to raise funds; he will remain in custody while awaiting trial.
Legal victory boosts confidence in the privacy sector, but still faces many market challenges
The significant legal victory for Tornado Cash undoubtedly injects new confidence into the cryptocurrency privacy sector.
Coinbase Chief Legal Officer Paul Grewal stated, "This is a historic victory for cryptocurrency and all those who care about defending freedom. Now, these smart contracts must be removed from the sanctions list, and U.S. users will once again be allowed to use this privacy-protecting protocol. In other words, the government's excessive intervention will not hold up."
ConsenSys General Counsel Matt Corva also believes this is a significant victory. This ruling again strikes a blow to the U.S. administration's exercise of power without updated and direct Congressional authorization. "This marks another significant victory for the crypto industry and a victory for the rights to develop privacy technology in the U.S. This ruling sets an important precedent for future cases involving privacy-enhancing tools," stated the crypto lobbying group Blockchain Association.
From the market data perspective, Tornado Cash remains one of the more popular privacy platforms in the cryptocurrency space. Although Tornado Cash experienced a temporary decline in deposits after being sanctioned, data from Flipside Crypto shows a significant recovery in deposits that began this year, with $1.9 billion in deposits received in the first half of this year, marking an approximate 50% growth compared to the total deposits for 2023.
However, the challenges faced by privacy projects like Tornado Cash are far from over. On one hand, Tornado Cash remains closely associated with a large number of criminal activities, including frequent incidents this year where hackers used the platform to launder funds. For example, in May, North Korean hackers used Tornado Cash to launder $150 million in stolen cryptocurrency, and Poloniex attackers transferred a total of 17,800 ETH to Tornado Cash; in July, UwUlend attackers moved about $4.28 million worth of ETH into Tornado Cash; in September, WazirX hackers laundered over $160 million through Tornado Cash; the same month, DeltaPrime hackers bridged all stolen funds (about $4.5 million) to the Ethereum network and deposited them into Tornado Cash; Indexed Finance attackers transferred over $4.5 million through Tornado Cash in October this year.
On the other hand, many platforms previously refused to engage in any financial interactions with Tornado Cash, and these institutions' policies need to adjust as the U.S. regulatory stance becomes clearer. For example, OKX founder Star publicly stated earlier this year that any users engaging in direct financial interactions with Tornado Cash would face account closures. The New York Federal Reserve Bank also disclosed in a report this year that Ethereum builders largely cooperated with the sanctions against Tornado Cash. These actions indicate that even if the court ruled OFAC's actions as overreach, the use and popularization of privacy tools like Tornado Cash still face significant resistance from regulators and the market.
