Author: Zhixiong Pan Source: ChainFeeds

Can immutable smart contracts become Target of sanctions? This was the central question faced by the U.S. Court of Appeals for the Fifth Circuit in the Tornado Cash case.

Yesterday, a court ruled that the sanctions imposed by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) on Tornado Cash were ultra vires. This ruling is not only a victory for the plaintiffs, but also triggers a discussion about technological neutrality and legal boundaries.

The rise of blockchain technology has brought about a revolution in privacy and decentralization, but it also comes with regulatory challenges. When privacy tool Tornado Cash became the center of a money laundering controversy, the U.S. Treasury Department slapped it with tough sanctions.

However, the court’s ruling pointed out that Tornado Cash’s immutable smart contract does not meet the traditional legal definition of “property”. These smart contracts are decentralized, self-running and uncontrolled code that cannot be owned or used exclusively. Therefore, including it on the "Specially Designated and Blocked Persons List" (SDN List) is considered to be beyond the scope of legal authorization.

The impact of this ruling goes far beyond the case itself. It not only involves the legality of blockchain privacy tools, but also major issues of technological neutrality and legal adaptability. The court's decision points out the direction for future legislation and regulation - the properties of the technology itself need to be distinguished from the behavior of malicious users to avoid excessive expansion of the power of administrative agencies due to the neutrality of the technology.

In fact, the judgment document in this case contains a lot of details and content worthy of attention.

Who is the plaintiff?

These plaintiffs claim to be users of Tornado Cash, but they are actually users of Ethereum and the crypto ecosystem. They come from the security audit team, Coinbase, client developers, hardware wallets, etc., and are supported by the Coinbase legal team. They are:

1.Joseph Van Loon (Auditware, former Apple)

2. Tyler Almeida (Coinbase)

3. Alexander Fisher (angel investor)

4. Preston Van Loon (Ethereum core developer and Offchain Labs / Arbitrum)

5. Kevin Vitale ( GridPlus)

6.Nate Welch (formerly zkSync, Coinbase)

Who is the defendant?

1. Department of the Treasury and U.S. Treasury Secretary Janet Yellen

2. Office of Foreign Assets Control (OFAC) and OFAC Director Andrea M. Gacki

Why did the plaintiff file the lawsuit?

The plaintiff filed a lawsuit against the defendant, challenging that it listed Tornado Cash's immutable smart contract as "property" and imposed sanctions outside the scope of legal authorization, violating the International Emergency Economic Regulations. Powers Act (IEEPA) and the Administrative Procedure Act (APA).

The plaintiff believes that these contracts are decentralized codes that run autonomously and cannot be controlled or owned, so they should not be targeted for sanctions.

Which court made the ruling?

The United States Court of Appeals for the Fifth Circuit is equivalent to the intermediate court, that is, the Federal Court of Appeals (United States Courts of Appeals). And 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 decision. Only a few cases make it to the Supreme Court on appeal or by special leave (such as a writ of certiorari).

What was the outcome of the court ruling?

The court ruled that the defendant (OFAC)'s sanctions against Tornado Cash violated the International Emergency Economic Powers Act (IEEPA) because immutable smart contracts do not qualify as "property" definition.

The court held that these smart contracts are decentralized, self-running and uncontrollable codes and should not be listed as targets of sanctions. At the same time, the court noted that while the technology could be misused, administrative agencies did not have the authority to extend sanctions beyond what the law provided. Ultimately, the court overturned the sanction decision and called on legislators to improve the legal gaps in emerging technologies.

Why did the plaintiff initiate the lawsuit on behalf of Tornado Cash?

Although these six plaintiffs are not developers of Tornado Cash, they all stated that they are users of Tornado Cash. They all expressed the need for Tornado Cash to enhance privacy and use it in legal applications. place.

For example, Tyler Almeida made an anonymous donation to support Ukraine through Tornado Cash, fearing possible retaliation from a Russian hacker group if the transaction was tracked. And Kevin Vitale turned to Tornado Cash to protect his privacy after discovering someone was linking his cryptocurrency activity to actual addresses. Several other people said similar things.

Immutable is the core keyword. How to define it?

In this case, there are many discussions, definitions and summaries surrounding the word immutable, which is equivalent to recognizing the particularity 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 ruling of the court is:

Because these immutable smart contracts are not 'property' under the word's common, ordinary meaning or under OFAC definitions, we hold that OFACexceeded its statutory authority.

Because these immutable smart contracts do not constitute "property in the ordinary and popular sense nor under OFAC's definition." ”, we determined that OFAC exceeded its statutory authority.

Also added,

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 the Tornado Cash smart contract.

The court’s definition of immutable smart contracts is:

A mutable smart contract is one which 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.

Variable smart contracts are contracts that are managed by some individual or group and can be changed.

Immutable smart contracts cannot be changed or removed from the blockchain. It is important to note that mutable smart contracts can be changed to an immutable state. But this is an irreversible process; once a smart contract becomes immutable, no one can regain control of it.

But hackers are really using Tornado Cash to launder money, what should we do? No solution yet.

North Korea's hacker organization Lazarus Group stole nearly $1 billion in cryptocurrency through hacking methods and needed to hide the source of the funds through coin mixers to complete money laundering. Therefore, OFAC accused Tornado Cash’s currency mixing function of being used for money laundering. They believe that Lazarus Group laundered more than 65% of its money through currency mixers in 2021, and Tornado Cash is one of the main tools.

So Tornado Cash is accused of having indirect links with the Lazarus Group’s money laundering activities and is therefore also included in the sanctions list.

The court also acknowledged that although Lazarus Group used Tornado Cash, this should not be a legal basis for sanctioning the entire agreement. Because immutable smart contracts do not belong to "property" or "services" in the traditional sense, the entire agreement cannot be sanctioned because of abuse by some users (such as the Lazarus Group).

Therefore, OFAC's actions exceeded the scope of the law. The court called for a solution to the problem by updating the law rather than expanding the existing sanctions framework.

IEEPA was legislated in 1997, long before the modern Internet

OThe main legal basis for FAC’s sanctions against Tornado Cash is the International Emergency Economic Powers Act (IEEPA), but the court also stated that “IEEPA was legislated in 1977, well before the invention of the modern Internet.”< /p>

IEEPA gives the President of the United States the power to impose economic sanctions on foreign-related "property" when there is an "exceptional and extraordinary threat" to security, economy, or diplomacy. OFAC considers Tornado Cash an "entity" and lists its smart contracts as tools linked to cybercriminal organizations such as North Korea's Lazarus Group.

But the court emphasized that it is Congress's responsibility to amend the law to meet the challenges of new technologies, rather than the judiciary filling loopholes by expanding legal interpretations. The court rejected the Treasury Department’s attempt to expand executive authority through judicial proceedings.

Finally

The significance of this judgment lies not only in the legality of the privacy tools behind Tornado Cash, but more importantly, for the entire blockchain industry and decentralized technology. Development draws clear legal boundaries. The particularities of immutable smart contracts were discussed in depth 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 also poses a new challenge for regulatory agencies: how to effectively curb its potential illegal uses while protecting technological innovation and privacy.

After all, this is a very attractive technology. These two sentences in the ruling document well illustrate the particularity of this technology:

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."

Simply put, these immutable smart contracts will continue to run regardless of whether OFAC places Tornado Cash on the sanctions list. .

Even if sanctions take effect, "these immutable smart contracts will remain open to anyone with an Internet connection."