The court ruled that "OFAC sanctions on Tornado Cash" are illegal, and TORN surged over 10 times

Author: Nan Zhi, Odaily Planet Daily

This morning, Coinbase Chief Legal Officer Paul Grewal posted on X stating: "Privacy wins. Today, the U.S. Fifth Circuit Court ruled that the U.S. Treasury's sanctions against the Tornado Cash smart contracts are illegal. This is a historic victory for cryptocurrency and for all who care about defending freedom." Uniswap founder referred to it as "immutable smart contracts defeating the Treasury in court."

Following the news, the Tornado Cash protocol token TORN surged rapidly, rising from a low of $3.7 to a high of $43 within an hour.

What are the specifics of the ruling, and what impact does it have on users, protocols, and related assets? Odaily will interpret this in the article.

Interpretation of Protocol Impact

Background Story

In August 2022, the U.S. Treasury's Office of Foreign Assets Control (OFAC) added Tornado Cash to its sanctions list (SDN), after which several countries, including Germany, France, and South Korea, conducted investigations, warnings, and sanctions against Tornado.

In terms of the U.S. OFAC sanctions, it can be summarized as follows:

• Access is prohibited, including shutting down front-end websites and banning technical access;
• Interaction is prohibited, forbidding all entities and citizens under U.S. jurisdiction from interacting with Tornado Cash, covering financial institutions, cryptocurrency platforms, wallet providers, etc.;
• Fund flow is prohibited, preventing U.S. financial institutions and cryptocurrency exchanges from any inflow or outflow of funds related to Tornado Cash.
• Assets are frozen, including virtual currencies and any assets owned or controlled by Tornado Cash within the U.S.

Additionally, in May 2024, one of the founders and core developers of Tornado Cash, 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 against Tornado Cash developer Roman Storm will enter trial proceedings. The U.S. Department of Justice has charged Storm and his colleague Roman Semenov with three counts, 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 hacker group Lazarus Group in laundering over $1 billion.

Court Ruling and Impact

Coinbase Chief Legal Officer Paul Grewal stated: "Tornado Cash will be removed from the sanctions list, and Americans will once again be allowed to use this privacy-preserving protocol. In other words, the government's overreach will not continue."

Uniswap founder Hayden Adams pointed out that a key point in the ruling document is: "We believe that the immutable smart contracts of Tornado Cash (the lines of software code that support privacy) are not '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 a detailed analysis, see the last section)

Protocol Revenue and Token Impact

After being sanctioned by OFAC in 2022, Tornado Cash's TVL (Total Value Locked) plummeted, but due to historical accumulation and the depth of its liquidity pool, Tornado remains the preferred mixer for hackers, with its TVL gradually recovering.

Although the front end was banned, hackers directly called the on-chain smart contracts for mixing, so the sanctions have little impact on these "core users." The author believes that the "revenue fundamentals" of TORN will not undergo significant changes due to the ruling; the main factors affecting the token's rise and fall are changes in sentiment and confidence. Therefore, although TORN surged tenfold within an hour this morning, it subsequently dropped nearly 70% in the following two hours. Readers are advised to focus on news and sentiment as the core basis for price judgment going forward.

Will Roman's Trial Be Affected?

After the Fifth Circuit Court's ruling was released, a user asked Consensys lawyer Bill Hughes, "Will Roman be released?"

In response, Bill stated: "This is a completely different matter. This does not mean that Tornado Cash is not a service, but rather that the immutable smart contracts included in the software as part of the platform are not a service. The U.S. Department of Justice claims 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 Ruling

This section specifically explains the logic and basis of the Fifth Circuit Court's ruling that the U.S. Treasury's sanctions against the Tornado Cash smart contracts are illegal. Readers may choose to read selectively.

Tornado Cash is Not a Service

OFAC argues: 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 human operation. Even according to the Treasury's definition, immutable smart contracts are merely lines of code; rather than being a 'service,' they are better described as tools used to provide a service.

Tornado Cash is Not Property

According to the International Emergency Economic Powers Act (IEEPA), OFAC's sanctioned targets must be "property" or "property" in which a foreign national has an interest.

The smart contracts of Tornado Cash are immutable, decentralized code that no economic entity can control; these smart contracts cannot be owned. Over 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 smart contracts. Even under the OFAC sanctions regime, it is impossible to prevent North Korean hackers from extracting assets, so Tornado Cash does not belong to sanctionable property.

In law, the government can only sanction entities that meet the definition of "property" or "service." If something is neither property nor service, the sanctions lose their legal basis.

(Note: For the court ruling document, see the original text.)