These immutable smart contracts will continue to function regardless of whether OFAC places Tornado Cash on its sanctions list.
Author: Pan Shio
Can immutable smart contracts be subject to sanctions? This was the central question facing the US Court of Appeals for the Fifth Circuit in the Tornado Cash case.
Yesterday, a court ruled that the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) sanctions against Tornado Cash went too far. This ruling was not only a victory for the plaintiffs, but also sparked a debate about the neutrality of technology and the boundaries of the law.
The rise of blockchain technology has revolutionized privacy and decentralization, but it also comes with regulatory challenges. When the privacy tool Tornado Cash became the focus of a money laundering controversy, the US Treasury imposed harsh sanctions on it.
However, the court's ruling noted that Tornado Cash's immutable smart contracts do not meet the traditional legal definition of “property.” These smart contracts are decentralized, self-executing, uncontrolled code that cannot be owned or used exclusively. Therefore, their inclusion on the Specially Designated Nationals and Blocked Persons List (SDN List) is considered to be beyond the scope of legal authorization.
The impact of this decision goes far beyond the lawsuit itself. This includes not only the legality of blockchain privacy tools, but also the important issues of technology neutrality and legal applicability. The court's decision has implications for future legislation and regulation. In other words, to avoid overextending administrative power through technology neutrality, it is necessary to distinguish the attributes of the technology itself from the actions of malicious users.
In fact, the judgment in this case contains many noteworthy details.
Who is the plaintiff?
Although these plaintiffs claim to be Tornado Cash users, they are actually users of Ethereum and the crypto ecosystem. They are comprised of security audit teams, Coinbase, client developers, hardware wallets, and more, and are supported by the Coinbase legal team. they are:
Joseph Van Loon (Auditware, ex-Apple) Tyler Almeida (Coinbase) Alexander Fisher (angel investor) Preston Van Loon (Ethereum core developer and Offchain Labs/Arbitrum) Kevin Vitale (GridPlus) Nate Welch (ex-zkSync, Coinbase)
Who is the defendant?
U.S. Treasury and Janet Yellen U.S. Secretary of the Treasury Office of Foreign Assets Control (OFAC) and OFAC Director Andrea M. Gacki
Why did the plaintiff file the lawsuit?
Plaintiffs allege violations of the International Emergency Economic Powers Act (IEEPA) and the Administrative Procedures Act (APA) by listing Tornado Cash's immutable smart contracts as “property” and imposing sanctions beyond the scope of legal authorization. Suspected, a lawsuit was filed against the defendant. .
Plaintiffs believe that these contracts should not be subject to sanctions because they are decentralized code that runs autonomously and cannot be controlled or owned.
Which court made the decision?
The United States Court of Appeals for the Fifth Circuit is the intermediate equivalent of the United States Court of Appeals. Above that is the United States Supreme Court, which sits at the apex of the entire federal judicial system and is the final decision-making body. Only a few cases can enter the Supreme Court through appeal or special permission (such as a writ of certiorari).
What was the court's decision?
The court ruled that defendant (OFAC)'s sanctions against Tornado Cash violated the International Emergency Economic Powers Act (IEEPA) because immutable smart contracts do not meet the definition of “property.”
The court held that these smart contracts are decentralized, self-executing, uncontrollable code and should not be subject to sanctions. The court also noted that while the technology could be misused, administrative agencies do not have the right to extend sanctions beyond the provisions of the law. In the end, the court reversed the sanctions decision and asked Congress to improve legal disparities in emerging technologies.
Why did the plaintiffs file suit on behalf of Tornado Cash?
Although these six plaintiffs are not the developers of Tornado Cash, they all said they were users of Tornado Cash, and all expressed the need for Tornado Cash to be more private and to be used in legal locations.
For example, Tyler Almeida anonymously donated to Ukraine aid through Tornado Cash because he feared retaliation from a group of Russian hackers if his transactions were tracked. Kevin Vitale turned to Tornado Cash to protect his privacy after discovering that someone had linked his cryptocurrency activity to his physical address. Several others have similar stories.
Immutability is a core keyword, but how do we define it?
In this case, a lot of discussion, definitions, and summaries revolve around the word immutable, which is tantamount to recognizing the peculiarities of new technologies such as decentralized systems and smart contracts. The court also recognized that this particularity of decentralized technology poses unique challenges to the current legal system.
The final judgment of the court was as follows:
Because these immutable smart contracts are not “property” in the common and ordinary meaning of that word or in OFAC’s definition, OFAC finds that it has exceeded its statutory authority.
We conclude that OFAC exceeded its statutory authority because these immutable smart contracts do not constitute “property” in either the ordinary colloquial sense or OFAC's definition.
He also added:
The immutable smart contracts at issue in this appeal are not property because they cannot be owned.
As a result, it is not possible to “exclude” someone from using the Tornado Cash pool's smart contracts.
The immutable smart contracts at issue in this lawsuit cannot be owned and therefore are not property.
Therefore, no one can “exclude” others from using Tornado Cash smart contracts.
The court's definition of an immutable smart contract is:
A mutable smart contract is a smart contract that is controlled and subject to change by some party or group.
Immutable smart contracts, on the other hand, cannot be changed or removed from the blockchain. Importantly, a mutable contract can be changed and become immutable. But it is an irreversible step. Once a smart contract becomes immutable, no one can regain control over it.
A mutable smart contract is a contract that is controlled and modifiable by a specific person or group.
Immutable smart contracts cannot be modified or removed from the blockchain. It is important to note that a mutable smart contract can be changed to an immutable state. However, this is an irreversible process. Once a smart contract becomes immutable, no one can regain control of it.
But what if hackers are actually using Tornado Cash to launder money? There is currently no solution.
North Korean hacker group Lazarus Group stole nearly $1 billion in cryptocurrencies through a hack that required them to use a coin mixer to conceal the source of their funds and complete the money laundering. As a result, OFAC charged that Tornado Cash's coin mixer functionality was being used for money laundering. They believe Lazarus Group used coin mixers to launder over 65% of its funds in 2021, and Tornado Cash was one of its main tools.
Therefore, Tornado Cash was accused of being indirectly involved in Lazarus Group's money laundering activities and was therefore also included in the sanctions list.
The court also recognized that although Lazarus Group used Tornado Cash, this should not be a legal basis for sanctioning the entire protocol. Immutable smart contracts are not “property” or “services” in the traditional sense, so the entire protocol cannot be sanctioned for the abuses of specific users (such as the Lazarus group).
OFAC's actions therefore exceeded its legal authority. The court called for resolving the issue by amending the law rather than expanding the existing sanctions framework.
IEEPA was established in 1977, long before the modern Internet was created.
Until now, OFAC's main legal basis for sanctioning Tornado Cash was the International Emergency Economic Powers Act (IEEPA), which the court ruled was “enacted in 1977, long before the invention of the modern Internet.” He also said.
IEEPA authorizes the U.S. president to impose economic sanctions on foreign-related “property” if there is an “unusual and unusual threat” to national security, the economy, or foreign policy. OFAC considers Tornado Cash an “entity” and lists its smart contracts as tools associated with cybercriminal organizations such as North Korea's Lazarus Group.
However, the court emphasized that it is Congress's responsibility to amend the law to meet the challenges of new technology, not the judiciary's responsibility to expand legal interpretation to fill in loopholes. The court rejected the Treasury Department's attempt to expand the executive branch's powers through the judicial process.
at last
The importance of this ruling lies not only in the legality of the privacy tools behind Tornado Cash, but more importantly, in defining clear legal boundaries for the blockchain industry as a whole and the development of decentralized technology. It's about being there. The particularities of immutable smart contracts are discussed in detail in this case, and the court's decision provides important judicial support for the legal use of similar technologies in the future.
At the same time, this poses new challenges for regulators: how to effectively curb potential illegal use while protecting innovation and privacy.
After all, this is a very attractive technology. The following two sentences from the ruling document best illustrate the uniqueness of this technology:
Simply put, immutable smart contracts will continue to operate regardless of OFAC’s designation of Tornado Cash.
Even with sanctions in place, “those immutable smart contracts remain accessible to anyone with an internet connection.”
Simply put, these immutable smart contracts will continue to function regardless of whether OFAC adds Tornado Cash to its sanctions list.
Even if sanctions are in place, “these immutable smart contracts will remain accessible to anyone with an internet connection.”
Author: Chainfeed
This article reflects the opinions of PANews columnists and does not represent the position of PANews. PANews assumes no legal liability. Articles and opinions do not constitute investment advice.
Image source: ChainFeeds If there is any copyright infringement, please contact the author to remove it.
