As a seasoned researcher with a keen interest in blockchain technology and its legal implications, I find this ruling by the Fifth Circuit Court of Appeals to be a significant step towards clarifying the boundaries of federal property laws in the digital age. The court’s decision to overturn the Treasury’s sanctions on Tornado Cash’s immutable smart contracts underscores the unique characteristics of decentralized systems and their inherent autonomy.
A U.S. appeals court ruled that the Treasury exceeded its authority by sanctioning Tornado Cash’s immutable smart contracts, declaring them outside the scope of federal property laws.
On November 26th, the Fifth Circuit Court of Appeals reversed an earlier decision made by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). This new ruling argues that self-governing smart contracts, which function without human intervention, cannot be considered as “property.
According to the decision, smart contracts that cannot be changed (immutable) are segments of code that neither belong to an owner nor can be managed, thus they lie beyond the jurisdiction of the International Emergency Economic Powers Act.
If you’re not familiar, the IEEPA (International Emergency Economic Powers Act) is a U.S. law that allows the President to control foreign trade activities and apply penalties or restrictions.
Yet, it was pointed out by the panel that due to their immutability, Tornado Cash’s smart contracts cannot be restricted using IEEPA, because they don’t fall under the category of services or assets that can be blocked.
In May 2020, a significant event called the “trusted setup ceremony” took place, which was essentially an update to the contract regarding Tornado Cash’s smart contracts. More than 1,000 individuals contributed essential cryptographic information during this ceremony, ultimately determining the cryptographic settings for these smart contracts.
Through preventing any modifications or management, the process made certain that every smart contract remained unchangeable. Later, control was passed on to the Tornado Cash community using the TORN token, a voting tool for proposing and deciding on protocol modifications, which was introduced in 2021 as an ERC-20 token.
Due to their self-governing nature, these smart contracts function independently without any human control. Unlike traditional assets or services, they can’t be categorized as such because they operate autonomously and do not require intervention from external entities. However, the Independent, Foreign, and International Economic Practices Act (IEEPA) is designed to regulate properties or services linked to foreign entities. Yet, since smart contracts are self-executing, they don’t conform to these definitions as outlined in the act.
The ruling rejected the Treasury’s interpretation of the law and concluded that “Legislating is Congress’s job.”
According to Paul Grewal, Coinbase’s Chief Legal Officer, he endorsed the decision by saying, “It’s not what Congress intended to prohibit the use of open-source technology altogether just because some individuals abuse it.
Coinbase, a strong supporter financially, has been an outspoken proponent of safeguarding open-source advancements within the cryptocurrency industry.
As a researcher delving into this topic, I’ve learned from ConsenSys lawyer Bill Hughes that the court’s ruling necessitates the exclusion of these particular contracts from the list of sanctions. Yet, it’s essential to note that other components of Tornado Cash or associated protocols could potentially still be subjected to sanctions.
“A good win. One which the Supreme Court would be unlikely to reverse,” he added.
The cryptocurrency tumbler known as Tornado Cash, which faced sanctions from the U.S. Treasury Department in August 2022, has been alleged to facilitate approximately $7 billion worth of transactions that were deemed illegal.
After the sanctions were imposed, six individuals, among them two employees from Coinbase, contested the Office of Foreign Assets Control’s (OFAC’s) decision to add 44 Tornado Cash smart contract addresses to the Specially Designated Nationals (SDN) list. They claimed that the U.S. Treasury improperly used its authority under the International Emergency Economic Powers Act (IEEPA).
In a Texas court, the initial judgment supported the Treasury Department’s actions, classifying Tornado Cash as an “entity” under OFAC rules. This ruling was contested by the involved parties, leading to the recent decision by the Fifth Circuit Court.
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2024-11-27 10:58