Tornado Cash Scores ‘Stunning Victory’ For Crypto Against US Treasury Department

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As a researcher with a deep interest in blockchain technology and its implications for financial systems, I find this ruling by the Fifth Circuit Court of Appeals to be nothing short of revolutionary. The decision to overturn the sanctions on Tornado Cash’s smart contracts is a significant step towards establishing clear boundaries for governmental regulatory authority over decentralized technologies.

On November 26th, it was decided by the Fifth Circuit Court of Appeals that the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) overstepped its boundaries when imposing sanctions on Tornado Cash’s unchangeable smart contracts within the crypto world. The court concluded that these self-governing smart contracts, which function without human input, cannot be categorized as “property” under federal law. As a result, they fall outside the jurisdiction of the International Emergency Economic Powers Act (IEEPA).

Crypto Wins Big Time

The court’s decision reverses OFAC’s previous classification of Tornado Cash’s smart contracts on the sanctions list. This action had substantial effects on privacy and decentralization within the cryptocurrency sector. The judges highlighted that immutable smart contracts, being lines of code beyond ownership or control, cannot be designated as property to be subjected to sanctions.

Tornado Cash functions as an open-source, decentralized system, empowering individuals to boost the confidentiality surrounding their cryptocurrency transactions within the Ethereum network. It does this by combining multiple transactions and hiding the path of funds, thus providing a degree of anonymity in the process.

As a crypto investor in August 2022, I was made aware of the U.S. Office of Foreign Assets Control (OFAC) sanctioning Tornado Cash. They claimed that this cryptocurrency mixing service had been used to launder over $7 billion since its inception in 2019, with funds traced back to North Korean hackers. This marked a significant shift as it was the first time the U.S. government took aim at a decentralized protocol rather than specific individuals or entities associated with it.

The Fifth Circuit’s ruling primarily revolves around understanding what “property” means in relation to the International Emergency Economic Powers Act (IEEPA). In essence, the court determined that unchangeable smart contracts, which are self-executing programs that operate independently on a blockchain, cannot be considered property. This is due to the fact that they cannot be possessed or managed by any person or organization. This differentiation is significant because the IEEPA empowers the Treasury Department to regulate or forbid transactions linked to foreign property ownership rights, but it does not encompass autonomous code without a possessor.

In simpler terms, the court explained that immutable smart contracts operate automatically and without need for human input. Unlike traditional property, they do not possess the characteristics recognized by federal law.

Crypto Industry Reactions

Paul Grewal, from the company Coinbase, celebrated a significant victory after the court ruling against the Treasury’s sanctions on Tornado Cash smart contracts, calling it a landmark triumph for the cryptocurrency community. In a post on X (previously Twitter), he expressed: “Victory for privacy! The Fifth Circuit has declared that the U.S. Treasury’s sanctions against Tornado Cash smart contracts are illegal. This is a monumental win for crypto and those who advocate for protecting liberty. Coinbase is honored to have spearheaded this crucial legal challenge.

As an analyst, I’d rephrase it like this: In my analysis, the Coinbase Chief Legal Officer highlighted the court’s acknowledgment that completely blocking open-source technology due to a few misbehaving users isn’t what Congress intended. He further pointed out that these sanctions exceeded the Treasury Department’s authority and the court’s decision rectifies this overextension.

Jake Chervinsky, representing Variant Fund as CLO, hailed the decision as a “remarkable triumph for cryptocurrency.” He further explained, “The court determined that unchangeable smart contract protocols aren’t ‘property’ subject to penalties because they can’t be owned. Consequently, OFAC’s 2022 designation of Tornado Cash was overturned. In essence, the decentralized model emerged victorious.

Matt Corva, a lawyer at ConsenSys, an Ethereum development firm, emphasized the importance of the decision as a restraint on excessive administrative power. He stated: “The Fifth Circuit Court of Appeals’ decision in favor of plaintiffs who contested the previous inclusion of Tornado Cash smart contracts on the sanctions list under the International Emergency Economic Powers Act is significant. This is an outstanding victory. It deals another heavy blow to the administrative system operating without recent and clear congressional mandate.

Corva additionally highlighted the unfair weight of responsibility shouldered by those impacted by such government decisions: “The financial toll on those affected when trying to rectify the situation is immense. This success wouldn’t have been achieved without the help of Coin Center, Paul Grewal from Coinbase, and numerous individuals who supported similar struggles across the nation in various other cases.

Hayden Adams, CEO of Uniswap Labs, showed surprise at the court’s ruling: “Wow! In a stunning turn of events, unalterable smart contracts have triumphed over the Treasury Department in court… It’s amazing to see how far cryptocurrency is progressing in federal courts.

Currently, there’s no word yet from the Treasury Department on whether they plan to contest the Fifth Circuit’s decision in court. If they choose to do so, this matter might progress to the Supreme Court.

At press time, the Tornado Cash token (TORN) traded at $18.08, up 415% in the last 24 hours.

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2024-11-28 02:12