Author: Nancy, PANews
The crypto privacy sector welcomes a key turning point.
Recently, the U.S. court overturned the ruling that sanctioned Tornado Cash's smart contracts, not only bringing a significant market rebound for the platform's token TORN, but also marking a milestone in defending the privacy rights of the crypto industry and preventing excessive government intervention. However, despite Tornado Cash's temporary legal victory, its developers still face criminal charges, and the platform will continue to face a series of market and regulatory challenges in the future.
OFAC sanctions deemed overreaching, 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, noting that the platform was used for laundering over $7 billion worth of cryptocurrency, and required all U.S. individuals and entities to refrain from providing relevant services to the Tornado Cash protocol, as well as prohibiting interactions with Ethereum wallet addresses sanctioned due to this protocol. The U.S. regulatory crackdown not only led many platforms to cease business dealings with Tornado Cash, but also severely impacted the development of the crypto privacy sector.
However, the lawsuit against Tornado Cash subsequently received support from organizations such as Coinbase and the crypto advocacy group Coin Center, which claimed that the sanctions were illegal. Among them, under the funding support of Coinbase, six individuals including Coinbase employees filed a lawsuit against the decision to place Tornado Cash on the sanctions list, and received a rehearing from the Fifth Circuit Court in January this year. Coin Center also filed a lawsuit against the U.S. OFAC regarding the sanctions on Tornado Cash, alleging that the agency's sanctions exceeded its statutory authority, but this lawsuit was ultimately dismissed this month.
After a two-year legal battle, the appeal case of Tornado Cash's sanctions finally received a new ruling. On November 26, the U.S. Fifth Circuit Court of Appeals overturned the lower court's ruling, determining that the Office of Foreign Assets Control (OFAC) exceeded its authority in sanctioning the immutable smart contracts of Tornado Cash.
In the ruling document, not only were several legitimate reasons for using Tornado Cash cited by the plaintiffs, such as protecting privacy, avoiding cyber attacks, and anonymous donations, but there was also a discussion on whether smart contracts can be considered 'property' or 'entities,' as well as whether OFAC has the authority to sanction them. Ultimately, the U.S. court concluded that although the Treasury Department has the authority to act against 'property,' the immutable nature of Tornado Cash's smart contracts means they cannot be controlled or owned, and therefore do not fall under the traditional definition of 'property' according to the International Emergency Economic Powers Act (IEEPA), and that legislative work concerning 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 blocking of open-source and self-executing software is overreaching at the statutory level, as these software are neither the 'property' of any foreign individual or entity, nor do they belong to anyone. Regardless of how noble OFAC's intentions may be, they have not been granted such broad powers to crack down on open-source software architectures. OFAC should focus sanctions on malicious actors abusing open-source software, not on the tools themselves.
As a result, Tornado Cash's token TORN experienced a surge on the morning of 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 Tornado Cash developers will be released. Among them, Tornado Cash co-founder Roman Storm was charged this year with three counts including money laundering and violating sanctions; his trial has been postponed until April next year, with defense costs estimated to reach $500,000 per month, although 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 for money laundering this year, and he is appealing the guilty verdict and seeking to raise funds, currently remaining in custody while awaiting trial.
Legal victory boosts confidence in the privacy track, but still faces many market challenges
Tornado Cash's important legal victory undoubtedly injects new confidence into the crypto privacy sector.
Coinbase Chief Legal Officer Paul Grewal stated, 'This is a historic victory for cryptocurrency and for all who care about defending freedom. Now, these smart contracts must be removed from the sanctions list, and U.S. users will again be allowed to use this privacy-protecting protocol. In other words, excessive government intervention will not be able to stand.'
Matt Corva, General Counsel of ConsenSys, also believes that this is a significant victory, as this ruling strikes again at the U.S. executive branch'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,' said the crypto lobbying group Blockchain Association.
From market data, Tornado Cash remains one of the more popular privacy platforms in the crypto space. Although Tornado Cash faced a slump in deposits after being sanctioned, data from Flipside Crypto shows a significant recovery in deposits starting this year, with $1.9 billion in deposits received in the first half of this year, a substantial increase of about 50% compared to the total deposit amount for the entire year of 2023.
However, challenges faced by privacy projects like Tornado Cash are far from over. On one hand, Tornado Cash remains closely linked to a large number of criminal activities, including frequent incidents this year where hackers used the platform for money laundering. For instance, in May, North Korean hackers laundered $150 million worth of stolen crypto assets using Tornado Cash, and Poloniex attackers transferred a total of 17,800 ETH to Tornado Cash; in July, UwUlend attackers transferred approximately $4.28 million worth of ETH into Tornado Cash; in September, WazirX hackers laundered over $160 million through Tornado Cash; that same month, DeltaPrime hackers bridged all stolen funds (approximately $4.5 million) to the Ethereum network and deposited it into Tornado Cash; and 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 the policies of these institutions also need to be adjusted as the U.S. regulatory stance becomes clearer. For example, OKX founder Star publicly stated this year that users engaging in direct financial interactions with Tornado Cash would face account termination. 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 measures indicate that even if the court rules that OFAC's actions are overreaching, the use and popularization of privacy tools like Tornado Cash still face tremendous resistance from regulators and the market.
