The U.S. court ruled that OFAC's sanctions on the Tornado Cash smart contract exceeded its authority. The encryption world has achieved a huge victory, and the battered encryption privacy track will regain its vitality. Under the existing legal framework, decentralized smart contracts will not be recognized as property and cannot be sanctioned according to current laws, laying a solid legal significance for its future development.

On November 27, the U.S. Court of Appeals for the Fifth Circuit overturned the sanctions imposed by the Office of Foreign Assets Control (OFAC) on the Tornado Cash smart contract, finding that the sanctions exceeded the scope of its administrative authority. The court held that while the Treasury had the authority to take action over "property," the Tornado Cash immutable smart contract could not be owned and controlled and therefore did not meet the definition of property. His inclusion on the Specially Designated and Blocked Persons List (SDN List) was deemed to exceed the scope of legal authority.

This verdict marks the end of the coin mixer Tornado Cash case that lasted more than two years of legal battles, and is a huge victory for the crypto world. The battered encryption privacy track is about to get a new lease of life. It also means that under the existing legal framework, decentralized smart contracts will not be recognized as property and cannot be sanctioned according to current laws, laying a solid legal significance for its future development.

It is worth noting that behind this Tornado Cash case is not only the struggle for survival of the encryption privacy track represented by Tornado Cash, but also the struggle for survival of the American encryption industry. Not only did two of the plaintiffs have Coinbase background, but they also provided legal assistance. Paul Grewal, chief legal officer of Coinbase, publicly stated that this is a historic victory for cryptocurrency and all those who care about defending freedom. . Now, these smart contracts must be removed from the sanctions list and American users will once again be allowed to use this privacy-preserving protocol. Over-intervention will fail to gain a foothold.

Ripple Chief Legal Officer Stuart Alderoty also said via Smart contracts are illegal, and both have a common theme: Regulators don’t make the laws, they just enforce them. If they want more power, only Congress can grant it.”

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OFAC’s sanctions against Tornado Cash will be traced back to 2022 , which added 38 Ethereum smart contracts related to Tornado Cash and 38 Ethereum smart contract addresses related to the Tornado Cash application to the U.S. Specially Designated (SDN) list, making them restricted entities, which is also the U.S. Sanctions were imposed on smart contract applications for the first time.

After the United States imposed sanctions, Germany, France, South Korea, etc. investigated, warned and sanctioned Tornado. Ethereum node providers, wallets and code bases quickly banned access to Tornado Cash users. Although Tornado Cash is still available, the web front-end is prohibited from interacting with third parties. Close, Tornado Cash The number of users has dropped sharply.

Why is Tornado Cash targeted by the United States?

Tornado.Cash is a fully decentralized, non-custodial protocol that improves transaction privacy by breaking the on-chain link between source and destination addresses. To protect privacy, Tornado.Cash uses an intelligent Contract that accepts ETH from an address and other tokens and allow them to withdraw to different addresses, i.e. send ETH and other tokens to any address in a way that hides the sending address. These smart contracts act as a pool that mixes all deposited assets when you send funds. When you put it into the pool (that is, make a deposit), a private credential (random key) will be generated to prove that you have performed a deposit operation. This private credential will then be used as your private key when withdrawing, and the contract will use ETH. Or other tokens are transferred to the designated receiving address, and the same user can use different withdrawal addresses.

There is no way to effectively trace it back through the mixer. Collecting the source of funds not only becomes an excellent breakthrough in protecting privacy, but also makes the marked black money and robber addresses white, becoming a money laundering tool in the eyes of hackers.

And since 2019 8 Since its launch in March, until it was sanctioned by the United States, Tornado Cash was the most popular cryptocurrency in the world.The most popular coin mixer in the ypto ecosystem, with a cumulative TVL of US$7.6 billion. At the same time, more than 90% of its funds are stored on Ethereum and run through smart contracts on Ethereum. It is also the largest privacy application of Ethereum.

OFAC, which has always been concerned about cryptocurrency, is affiliated with the U.S. Department of the Treasury and has previously sanctioned individuals and entities related to cryptocurrency and related parties. address, and the sanctions related to Tornado Cash are due to money laundering and criminal transactions.

As the largest privacy coin, Tornado’s coin mixer can not only effectively protect user privacy, but also provides a breeding ground for criminal behavior. According to data from OFAC, Tornado Cash has been used to launder more than $7 billion in virtual currencies since its launch, with approximately 35% of the transaction volume coming from criminal organizations.

The direct trigger for Tornado Cash being sanctioned by OFAC was that the North Korean hacker group Lazarus Group laundered nearly $1 billion in stolen cryptocurrency through a coin mixer. , OFAC accused Tornado Cash of being the main money laundering vehicle of Lazarus Group.

OFAC stated that it sanctioned Tornado Cash because it assists, sponsors, or provides financial, material or technical support, or provides goods for most online activities originating from outside the United States. or services that could pose a major threat to the security, diplomacy, economic health or financial stability of the United States, lead to serious misappropriation of funds or economic resources, trade secrets, personal identification or financial information, and allow certain criminals to gain access to business or competition. advantage or private financial gain.

Through the sanctions against Tornado Cash, the currency mixer ecosystem has suffered an unprecedented blow. For legal security reasons, various ecosystems have imposed restrictions on the currency mixer ecosystem. Put a question mark. From an objective point of view, it has indeed effectively combated money laundering, but for the encryption ecosystem, there is a question mark on the privacy track and the prospects of decentralized applications. Even for the stablecoin ecology and DeFi ecology, it is not a positive news. If the stablecoin is pledged through the stablecoin, if the stablecoin is frozen, there will be problems with the identification of assets and liabilities.

This is also the reason why Coinbase has been actively promoting the case. Fortunately, the final result is good for the encryption circle.

After the court ruling was announced, the Tornado Cash protocol token TORN rose rapidly, rising from a low of $3.7 to a maximum of $35.74 within an hour. As of press time, TORN is currently stable at around $14. .

The surge in price shows the flow of whale funds and the direction of the market, which has a negative impact on Tornado Cash and its protocol tokens. The future of TORN is full of confidence

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In any case, the victory of this judgment is a very meaningful and major event for the encryption industry. Not only for Tornado Cash The legality of the privacy tools behind it, and more importantly, has drawn clear legal boundaries for the development of the entire blockchain industry and decentralized technology. The particularity of immutable smart contracts has also gained attention. In the future, similar technologies will be legal. Sexual use has received important judicial support. The US legal system recognizes decentralized protocols as a new type of infrastructure.

Former a16z executive Katie Haun's venture Vote for Haun Ventures has previously issued an article stating that OFAC’s action of blocking open source and self-executing software is ultra vires at the legal level. These software are neither the “property” of any foreign individual or entity nor belong to anyone, no matter how noble OFAC’s intentions are. , have not given such broad powers to crack down on open source software architecture. OFAC should focus its sanctions on malicious actors who abuse open source software, rather than the tools themselves.

For Tornado For Cash, the interaction data has been falling off a cliff since being sanctioned. However, Tornado Cash is still one of the more popular privacy platforms in the encryption field. Tornado Cash has seen a significant recovery in deposit volume since the beginning of this year, with a total of to $1.9 billion in deposits, a significant increase of about 50% from the total number of deposits for the whole of 2023.

It should be noted that for Tornado. For privacy projects such as Cash, the challenge is far from over. Due to the limitations of third-party interfaces, the ordinary interaction data of its platform has declined significantly, so the money laundering charges it faces still exist. From now on, uncontrolled smart contracts will no longer be regarded as asset control, but this is not a victory for the privacy track. Although the privacy trackA big step forward, but there are still many challenges waiting for regulatory authorities in the future.

For regulatory authorities, in addition to sanctioning smart contracts, how to curb illegal uses on the edge of technological innovation and privacy protection is A difficult problem needs to be faced.

Finally, the direct beneficiaries of this ruling are the Ethereum ecosystem and the DeFi ecosystem. 10X Research stated in a report to investors after the ruling was announced: While the ruling does not endorse money laundering, it sets a precedent that allows programmers to develop and publish smart contract protocols without charging fees and without fear of sanctions. Since Ethereum remains the mainstay of DeFi, this decision has positive implications for the broader DeFi ecosystem and other protocols, especially on the Ethereum network.