Author: Nancy, PANews
The crypto privacy sector welcomes a critical turning point.
Recently, a U.S. court overturned the sanctions ruling against Tornado Cash's smart contracts, not only bringing a significant market rebound for the platform's token TORN but also having milestone significance for 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 face a series of market and regulatory challenges in the future.
OFAC's sanction actions have been ruled as overreaching, and developers still face criminal charges
In August 2022, the U.S. Department of the Treasury'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 demanded that all U.S. individuals and entities be prohibited from providing services related to the Tornado Cash protocol, as well as prohibiting interaction with Ethereum wallet addresses sanctioned due to the protocol. The U.S. regulatory crackdown not only led many platforms to suspend their business dealings with Tornado Cash but also severely impacted the development of the crypto privacy sector.
However, the Tornado Cash lawsuit subsequently received support from organizations like Coinbase and crypto advocacy group Coin Center, claiming that the sanctions were illegal. Among them, with funding support from Coinbase, six individuals, including Coinbase employees, filed a lawsuit against the decision to place Tornado Cash on the sanctions list, and in January of this year, they obtained a rehearing from the U.S. Fifth Circuit Court. Coin Center also filed a lawsuit against U.S. OFAC regarding the sanctions imposed on Tornado Cash, accusing the agency's sanctions of exceeding its statutory authority, but this lawsuit was ultimately dismissed this month.
After two years of legal battles, the appeal case against the sanctions on Tornado Cash has 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 when sanctioning the immutable smart contracts of Tornado Cash.
In the judgment document, not only were the legitimate reasons for several plaintiffs using Tornado Cash listed, such as protecting privacy, avoiding cyber attacks, and anonymous donations, but it also discussed whether smart contracts could be considered 'property' or 'entities,' and whether OFAC had the authority to sanction them. Ultimately, the U.S. court concluded that while the Treasury has the authority to act against 'property,' Tornado Cash's smart contracts are immutable, cannot be controlled or owned, and therefore do not meet the traditional definition of 'property' under the International Emergency Economic Powers Act (IEEPA), and that legislation 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 in a statement that OFAC's action to block open-source and self-executing software is legally overreaching. 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, it does not grant such broad powers to target open-source software frameworks. 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. According to CoinGecko data, TORN increased by over 9.6 times within 24 hours.
It is worth mentioning that the victory in this 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 three counts, including money laundering and violating sanctions, and his trial has been postponed until April next year, with estimated defense costs reaching up to $500,000 per month. However, his legal defense fund has received donations from people like Vitalik; another developer, Alexey Pertsev, was sentenced to 64 months in prison by a Dutch court this year for money laundering and is appealing the guilty verdict while seeking to raise funds, currently remaining in custody during the waiting period for trial.
Legal victory boosts confidence in the privacy sector, but still faces numerous market challenges
The important legal victory for Tornado Cash undoubtedly injects new confidence into the crypto 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 again be allowed to use this privacy-protecting protocol. In other words, the government's excessive intervention will not hold up.'
Matt Corva, Chief Legal Counsel at ConsenSys, also believes this is a significant victory. This ruling again strikes 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 of the U.S. to develop privacy technology. This ruling sets an important precedent for future cases involving privacy-enhancing tools,' said the crypto lobbying group Blockchain Association.
From the market data perspective, Tornado Cash remains one of the more popular privacy platforms in the crypto space. Although the deposit volume of Tornado Cash once plummeted after the sanctions, statistics from Flipside Crypto show a significant recovery in deposit volume starting this year, with $1.9 billion in deposits received just in the first half of this year, a substantial growth of about 50% compared to the total deposit volume for the entire year of 2023.
However, the challenges faced by privacy projects like Tornado Cash are far from over. On one hand, Tornado Cash remains closely linked to a large amount of criminal activity, including numerous incidents this year where hackers utilized the platform for money laundering. For example, in May, North Korean hackers used Tornado Cash to launder $150 million worth of stolen crypto assets, 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 to Tornado Cash; in September, WazirX hackers laundered over $160 million through Tornado Cash; the same month, DeltaPrime hackers bridged all stolen funds (approximately $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, among others.
On the other hand, many platforms previously refused to engage in any financial interaction with Tornado Cash, and these institutions' policies will need to be adjusted as the U.S. regulatory stance becomes clearer. For instance, OKX founder Star publicly stated this year that any users directly interacting with Tornado Cash for financial transactions 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 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 significant resistance from regulators and the market.