Author: Nancy, PANews
The privacy track in the crypto industry is facing a critical turning point.
Recently, a U.S. court overturned the ruling to sanction the Tornado Cash smart contract, which not only brought a huge market rebound to the platform's token TORN, but also marked a milestone in defending the privacy rights of the crypto industry and preventing excessive government intervention. However, although Tornado Cash has won a temporary legal victory, its developers still face criminal charges, and the platform will continue to face a series of market and regulatory challenges in the future.
OFAC's sanctions ruled as exceeding authority,developers still face criminal charges
In August 2022, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) announced sanctions on the mixer Tornado Cash, stating that the platform had been used to launder over $7 billion worth of cryptocurrencies, and required all U.S. individuals and entities to cease providing any services related to the Tornado Cash protocol, as well as prohibiting interactions with the Ethereum wallet addresses sanctioned due to the protocol. The regulatory crackdown by the U.S. not only caused many platforms to suspend their business dealings with Tornado Cash, but also dealt a serious blow to the development of the crypto privacy track.
However, the Tornado Cash lawsuit case later received appeals support from institutions such as Coinbase and the crypto advocacy organization Coin Center, who claimed the sanctions were illegal. With Coinbase's financial support, six people, including Coinbase employees, filed a lawsuit against the decision to include Tornado Cash in the sanctions list, and won a retrial in the U.S. Fifth Circuit Court of Appeals in January this year. Coin Center also sued OFAC over the Tornado Cash sanctions, alleging that the agency had exceeded its statutory authority, but the lawsuit was ultimately dismissed this month.
After nearly two years of legal battles, the appeal case against the Tornado Cash sanctions has finally received the latest ruling. On November 26, the U.S. Fifth Circuit Court of Appeals overturned the lower court's decision, ruling that the Office of Foreign Assets Control (OFAC) had exceeded its authority when sanctioning the immutable Tornado Cash smart contract.
The judgment not only listed the legitimate reasons for the plaintiffs to use Tornado Cash, such as protecting privacy, avoiding cyber attacks, and anonymous donations, but also discussed whether smart contracts can be considered "property" or "entities", and whether OFAC has the right to impose sanctions on them. Ultimately, the U.S. court ruled that while the Treasury Department has the authority to take action against "property", the Tornado Cash smart contract is immutable and cannot be controlled or owned, and therefore does not meet the traditional definition of "property" under the International Emergency Economic Powers Act (IEEPA), and that legislation on smart contracts should be led by Congress.
In fact, regarding OFAC's sanctions, former a16z executive KatieHaun's venture capital firm Haun Ventures had previously pointed out that OFAC's blocking of open-source and self-executing software is ultra vires at the legal level, as these software are neither the "property" of any foreign individual or entity, nor do they belong to anyone, and regardless of OFAC's noble intentions, it has not been granted such broad powers to attack open-source software architectures. OFAC should focus its sanctions on malicious actors who abuse open-source software, rather than the tools themselves.
As a result, the Tornado Cash token TORN experienced a massive surge on the morning of November 27. CoinGecko data shows that TORN soared over 9.6 times within 24 hours.
It is worth noting that the victory in this appeal does not mean that the Tornado Cash developers will be released. Tornado Cash co-founder Roman Storm was charged with money laundering and sanctions violations this year, and his trial has been postponed to April next year, with defense costs estimated at up to $500,000 per month, although his legal defense fund has received funding donations from Vitalik and others; another developer, Alexey Pertsev, was sentenced to 64 months in prison by a Dutch court this year for money laundering, and he is currently appealing the guilty verdict and seeking to raise funds, and will remain in detention during the trial period.
Legal victory boosts confidence in the privacy track,but still faces many market challenges
Tornado Cash's important legal victory has undoubtedly injected new confidence into the crypto privacy field.
Coinbase Chief Legal Officer Paul Grewal said, "This is a historic victory for cryptocurrency and all who care about defending freedom. Now these smart contracts must be removed from the sanctions list, and U.S. users will be allowed to use this privacy-protecting protocol again. In other words, the government's overreach will not stand." ConsenSys General Counsel Matt Corva also believes this is a huge victory, as the ruling once again strikes a blow against the U.S. executive branch's exercise of power without updated and direct congressional authorization. "This marks another major victory for the crypto industry, and a victory for the right to develop privacy technologies in the U.S.," said the Blockchain Association, a crypto lobbying group.
Looking at market data, Tornado Cash remains one of the more popular privacy platforms in the crypto space. Although Tornado Cash's deposit volume dipped after the sanctions, Flipside Crypto's statistics show that Tornado Cash's deposit volume has seen a significant recovery since the beginning of this year, receiving $1.9 billion in deposits in the first half of the year alone, a roughly 50% increase over the total deposits for the full year of 2023.
However, the challenges facing projects like Tornado Cash are far from over. On the one hand, Tornado Cash is still closely linked to a large number of criminal activities, with incidents of hackers using the platform to launder stolen crypto assets becoming increasingly common. For example, in May this year, North Korean hackers used Tornado Cash to launder $150 million in stolen crypto assets; in July, the UwUlend attacker transferred about $4.28 million worth of ETH to Tornado Cash; in September, the WazirX hacker had already laundered over $160 million through Tornado Cash; also in September, the DeltaPrime hacker bridged all the stolen funds (about $4.5 million) to the Ethereum network and deposited them into Tornado Cash; the Indexed Finance attacker moved over $4.5 million through Tornado Cash in October.
On the other hand, many platforms have previously refused to have any financial interactions with Tornado Cash, and these institutions' policies will need to be adjusted as the U.S. regulatory stance becomes clearer. For example, OKX founder Star publicly stated this year that any user who directly interacts with Tornado Cash will face account termination. The Federal Reserve Bank of New York also disclosed in a report this year that Ethereum builders have largely complied with the sanctions against Tornado Cash. These measures indicate that even if the court rules OFAC's actions as exceeding authority, the use and popularization of privacy tools like Tornado Cash still face huge resistance from regulators and the market.
