Article reproduced from: ChainFeeds
Author: ZHIXIONG PAN
Can immutable smart contracts (immutable smart contracts) be subject to sanctions? This is the core issue faced by the United States Court of Appeals for the Fifth Circuit in the Tornado Cash case.
Yesterday, the court ruled that the U.S. Treasury's Office of Foreign Assets Control (OFAC) overstepped its authority in sanctioning Tornado Cash. This ruling is not only a victory for the plaintiffs but also sparks discussions about technological neutrality and legal boundaries.
The rise of blockchain technology has brought about a revolution in privacy and decentralization, but it has also been accompanied by regulatory challenges. When the privacy tool Tornado Cash became the focus of money laundering controversies, the U.S. Treasury imposed severe sanctions against it.
However, the court's ruling pointed out that the immutable smart contracts of Tornado Cash do not meet the traditional legal definition of 'property.' These smart contracts are decentralized, self-operating, and uncontrollable code that cannot be owned or used exclusively. Therefore, placing them on the Specially Designated Nationals and Blocked Persons List (SDN List) was deemed to exceed the legally authorized scope.
The impact of this ruling extends far beyond the case itself. It not only involves the legality of blockchain privacy tools but also concerns significant issues of technological neutrality and legal adaptability. This court ruling points the way for future legislation and regulation—distinguishing the attributes of technology itself from the actions of malicious users, avoiding the over-expansion of administrative powers due to the technology's neutrality.
In fact, the judgment document of this case contains many details and content worth attention.
Who is the plaintiff?
These plaintiffs claim to be users of Tornado Cash, but they are also users of Ethereum and the crypto ecosystem. They come from security audit teams, Coinbase, client developers, hardware wallets, etc., and have the support of Coinbase's legal team. They are:
Joseph Van Loon (Auditware, former Apple)
Tyler Almeida (Coinbase)
Alexander Fisher (Angel Investor)
Preston Van Loon (Ethereum Core Developer and Offchain Labs / Arbitrum)
Kevin Vitale (GridPlus)
Nate Welch (former zkSync, Coinbase)
Who is the defendant?
The U.S. Department of the Treasury and U.S. Treasury Secretary Janet Yellen
The Office of Foreign Assets Control (OFAC) and OFAC Director Andrea M. Gacki
Why did the plaintiff file the lawsuit?
The plaintiff sued the defendant, questioning its classification of Tornado Cash's immutable smart contracts as 'property' and its implementation of sanctions beyond its legal authority, violating the International Emergency Economic Powers Act (IEEPA) and the Administrative Procedure Act (APA).
The plaintiffs argue that these contracts are self-operating decentralized code that cannot be controlled or owned, and therefore should not be subject to sanctions.
Which court made the ruling?
The United States Court of Appeals for the Fifth Circuit is equivalent to an intermediate court, which is the federal appellate court. Above it is the Supreme Court of the United States, which is at the top of the entire federal judicial system and is the final adjudicating body. Only a few cases can enter the Supreme Court through appeal or special permission (such as a writ of certiorari).
What was the result of the court's ruling?
The court ruled that the defendant (OFAC) violated the International Emergency Economic Powers Act (IEEPA) in its sanctions against Tornado Cash because immutable smart contracts do not meet the definition of 'property.'
The court held that these smart contracts are decentralized, self-operating, and uncontrollable code, and should not be subject to sanctions. Meanwhile, the court pointed out that while the technology may be abused, administrative agencies do not have the authority to expand the scope of sanctions beyond legal provisions. Ultimately, the court overturned the sanction decision and called for legislative bodies to address the legal gaps regarding emerging technologies.
Why did the plaintiff help initiate the lawsuit against Tornado Cash?
Although these six plaintiffs are not developers of Tornado Cash, they all state that they are users of Tornado Cash and express the need for Tornado Cash to enhance privacy and be applied in legitimate contexts.
For example, Tyler Almeida anonymously donated to Ukraine through Tornado Cash, fearing that if the transaction was tracked, he might face retaliation from Russian hacker groups. Kevin Vitale, upon discovering that someone had linked his cryptocurrency activities to his actual address, turned to Tornado Cash to protect his privacy. Others have made similar statements.
Immutable is the key term; how is it defined?
In this case, there was much discussion, definition, and summary surrounding the word immutable, which essentially recognized the uniqueness of decentralized systems and smart contracts as new technologies. The court also recognized that this uniqueness of decentralized technology presents unique challenges to the current legal system.
The court's final ruling is:
Because these immutable smart contracts are not ‘property’ under the word’s common, ordinary meaning or under OFAC definitions, we hold that OFAC exceeded its statutory authority.
Because these immutable smart contracts do not constitute 'property' in either the common, ordinary sense or under OFAC's definition, we find that OFAC exceeded its statutory authority.
it was also added that
The immutable smart contracts at issue in this appeal are not property because they are not capable of being owned.
And as a result, no one can ‘exclude’ anyone from using the Tornado Cash pool smart contracts.
The immutable smart contracts involved in this case are not property because they cannot be owned.
Therefore, no one can 'exclude' others from using Tornado Cash smart contracts.
The court's definition of immutable smart contracts is:
A mutable smart contract is one that is managed by some party or group and may be changed. An immutable smart contract, on the other hand, cannot be altered or removed from the blockchain. Importantly, a mutable contract may be altered to become immutable. But that is an irreversible step; once a smart contract becomes immutable, no one can reclaim control over it. A mutable smart contract is managed by certain individuals or groups and can be changed. An immutable smart contract, however, cannot be altered or removed from the blockchain. It is important to note that a mutable smart contract can be changed to an immutable state. But this is an irreversible process; once a smart contract becomes immutable, no one can regain control over it.
But what if hackers are really using Tornado Cash for money laundering? There is no solution for now.
The North Korean hacker group Lazarus Group stole nearly $1 billion worth of cryptocurrencies through hacking and needed to hide the source of funds using mixers to complete money laundering. Thus, OFAC accused Tornado Cash's mixing function of being used for money laundering, claiming that Lazarus Group laundered over 65% of its funds through mixers in 2021, with Tornado Cash being one of the main tools.
Thus, Tornado Cash was indirectly linked to the money laundering activities of the Lazarus Group and was included in the sanctions list.
The court also acknowledged that while the Lazarus Group used Tornado Cash, this should not serve as a legitimate basis for sanctioning the entire protocol. Because immutable smart contracts do not fall under the traditional definition of 'property' or 'services', the entire protocol should not be sanctioned due to the abuse by certain users (such as the Lazarus Group).
Therefore, OFAC's actions exceeded its legally authorized scope. The court calls for addressing the issue through updating laws, rather than expanding the current sanctions framework.
The legislative time of IEEPA was in 1977, long before the modern internet
Previously, OFAC's main legal basis for sanctioning Tornado Cash was the International Emergency Economic Powers Act (IEEPA), but the court also stated, 'The legislative time of IEEPA was in 1977, long before the invention of the modern Internet.'
IEEPA grants the U.S. President the authority to impose economic sanctions on foreign-related 'property' when national security, economic, or foreign policy is under 'unusual and extraordinary threat.' OFAC considers Tornado Cash to be an 'entity' and its smart contracts to be tools related to cybercrime organizations such as North Korea's Lazarus Group.
However, the court emphasized that it is Congress's responsibility to amend laws to respond to new technological challenges, rather than for the judiciary to fill gaps by expanding legal interpretations. The court rejected the Treasury's attempt to expand administrative powers through judicial procedures.
In conclusion
The significance of this ruling lies not only in the legality of the privacy tools behind Tornado Cash but, more importantly, it establishes clear legal boundaries for the development of the entire blockchain industry and decentralized technology. The uniqueness of immutable smart contracts was deeply discussed in this case, and the court's ruling provides important judicial support for the legal use of similar technologies in the future.
At the same time, this has also posed new challenges for regulators: how to effectively curb its potential illegal uses while protecting technological innovation and privacy.
After all, this is a very compelling technology, and these two sentences in the ruling document illustrate the uniqueness of the technology well:
Simply put, regardless of OFAC’s designation of Tornado Cash, the immutable smart contracts continue operating.
Even with the sanctions in place, 'those immutable smart contracts remain accessible to anyone with an internet connection.'
In simple terms, regardless of whether OFAC includes Tornado Cash on the sanctions list, these immutable smart contracts will continue to operate.
Even with the sanctions in effect, 'these immutable smart contracts remain open to anyone with an internet connection.'