Written by: Nan Zhi, Odaily Planet Daily
This morning, Coinbase's Chief Legal Officer Paul Grewal posted on X, stating: 'Privacy rights have won. Today, the U.S. Fifth Circuit Court ruled that the U.S. Treasury's sanctions against Tornado Cash smart contracts are illegal. This is a historic victory for cryptocurrency and all who care about defending freedom.' The founder of Uniswap called it 'immutable smart contracts defeating the Treasury in court.'
After the news broke, the Tornado Cash protocol token TORN quickly surged, rising from a low of $3.7 to a high of $43 within an hour.
What is the specific content of the judgment, and what impact does it have on users, agreements, and related assets? Odaily will interpret it in this article.
Interpretation of protocol impact
Story background
In August 2022, the U.S. Treasury's Office of Foreign Assets Control (OFAC) placed Tornado Cash on the sanctions list (SDN), after which Germany, France, South Korea, and several other countries conducted investigations, warnings, and sanctions against Tornado.
In terms of U.S. OFAC sanctions, it can be simply summarized as:
Access is prohibited, including closing front-end websites and prohibiting technical access;
Interaction is prohibited, preventing all entities, citizens, and various objects under U.S. jurisdiction from interacting with Tornado Cash, covering financial institutions, cryptocurrency platforms, wallet providers, etc.;
Flow of funds is prohibited, preventing U.S. financial institutions and cryptocurrency exchanges from engaging in any fund inflows or outflows related to Tornado Cash.
Assets are frozen; all assets owned or controlled by Tornado Cash within the United States, including virtual currencies, are frozen.
In addition, in May 2024, one of the founders of Tornado Cash, core developer, and 31-year-old Russian citizen Alexey Pertsev 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 Tornado Cash developer Roman Storm will enter the trial phase. The U.S. Department of Justice accuses Storm and his colleague Roman Semenov of three charges, including conspiracy to commit money laundering, operating an unlicensed money transfer business, and violating the International Emergency Economic Powers Act, involving assisting the North Korean hacking organization Lazarus Group in laundering over $1 billion.
Court ruling and impact
Coinbase's Chief Legal Officer Paul Grewal stated: 'Tornado Cash will be removed from the sanctions list, and Americans will be allowed to use this privacy protection protocol again. In other words, the government's overreach will not continue.'
Uniswap founder Hayden Adams pointed out that the key content in the judgment document is: 'We believe that Tornado Cash's immutable smart contracts (software code lines supporting 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 last section)
Protocol income and token impact
After being sanctioned by OFAC in 2022, Tornado Cash's TVL plummeted at one point, but due to historical accumulation and liquidity pool depth issues, Tornado remains the preferred mixer for hackers, and its TVL has been steadily recovering.
Although the front end is blocked, hackers directly call on-chain smart contracts to mix coins, and sanctions have little impact on these 'core users'. The author believes that the 'fundamentals' of TORN's income will not undergo significant changes due to the judgment; what affects the rise and fall of the token is primarily changes in sentiment and confidence. Therefore, although TORN skyrocketed tenfold within one hour this morning, it subsequently fell nearly 70% in the next two hours, suggesting readers focus on news and sentiment as the core basis for price judgment.
Does the trial of Roman have any impact?
After the Fifth Circuit Court's ruling was released, a user consulted Consensys lawyer Bill Hughes, asking 'Will Roman be released?'
Bill's response to this is: 'This is completely another matter. This does not mean that Tornado Cash is not a service, but that the immutable smart contracts contained in 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 smart contracts are illegal. Readers can choose to read selectively.
Tornado Cash is not a service.
OFAC argues that 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 any human operation. Even according to the Treasury's definition, immutable smart contracts are merely lines of code; rather than being referred to as 'services', it is more accurate to say they are tools used to provide services.
Tornado Cash is not property
According to the International Emergency Economic Powers Act (IEEPA), OFAC's sanctions targets must be 'property' or 'property' in which a foreign person has an interest.
The smart contracts of Tornado Cash are an immutable, decentralized code that no economic entity can control; these smart contracts cannot be owned. More than a thousand volunteers participated in a trusted setup ceremony to 'irreversibly remove anyone's ability to update, remove, or control these lines of code'. Therefore, no one can exclude others from using the Tornado Cash pool's smart contracts. Even under the OFAC sanctions regime, it cannot prevent North Korean hackers from extracting assets, thus Tornado Cash does not belong to 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, sanctions lose their legal basis.
(Note: For details of the court ruling document, please refer to the original text.)