US court finds imposing sanctions on Tornado Cash smart contracts an abuse of power

Crypto mixer smart contracts do not have an administrator key, so no one can control them, and they are not considered proprietary

27.11.2024 - 09:20

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7 min

What’s new? A US Federal Appeals court has ruled that the Treasury Department exceeded its authority by sanctioning crypto mixer Tornado Cash. As explained by Bill Hughes, legal counsel for Ethereum software developer Consensys, the issue at stake was the sanctioning of immutable smart contracts deployed by the mixer’s developers. The DOJ acted improperly because these contracts are not the property of a foreign person or entity, thus the sanctions are deemed illegitimate.

Source: X.com

What else is known? According to an excerpt from court documents, Tornado Cash’s immutable smart contracts are not property because they cannot be owned. When the mixer was launched, the community of more than a thousand users irrevocably removed the ability to modify, delete, or otherwise control its code. As a result, no user can be suspended from using Tornado Cash pools’ smart contracts.

Thus, the Treasury Department’s sanctions have no way to prevent North Korean hackers from using Tornado Cash because the immutable smart contracts continue to operate without anyone’s control.

Moreover, because the software continues to operate regardless of sanctions, and because blockchain technology allows for P2P transfers without the recipient's consent, some users risk legal and financial consequences if someone transfers cryptocurrency to them via Tornado Cash, even without their knowledge and consent.

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The court also noted that smart contracts, which are lines of code, cannot fall under the definition of a service and are more of a tool that is used to provide a service. In addition, under the Treasury Department’s own rules, they are not property that can be sanctioned.

“In sum, they cannot be blocked under federal law. They certainly can’t be blocked as an exercise of OFAC’s discretion,” the document says.

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This case addressed the propriety of sanctioning smart contracts without an administrator key. The court emphasizes: that this decision does not mean that other elements of Tornado Cash are unavailable to the Treasury Department.

According to Bill Hughes, the Supreme Court is unlikely to overturn this ruling of the Court of Appeal.

The lawsuit against the DOJ, backed by Coinbase and its general counsel Paul Grewal, was filed by six employees of the exchange: Joseph Van Loon, Preston Van Loon, Tyler Almeida, Alexander Fisher, Kevin Vitale, and Nate Welch. They insisted that Tornado Cash could not be the subject of sanctions because it was software.

Last August, their lawsuit was dismissed by a court in the Western District of Texas. Judge Robert Pitman ruled that the service has founders, developers, and a decentralized autonomous organization (DAO) managing its work — the presence of these elements allows it to be recognized as a legal entity that can be the subject of sanctions.

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Tornado Cash situation. The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions on the service in August 2022. The reason was money laundering, stolen by North Korean hackers to finance a weapons program.

Immediately after that, Alexey Pertsev, the service’s developer, was detained in the Netherlands, found guilty of laundering $1,2 billion, and sentenced to 64 months in prison, but denied bail.

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In turn, the US Justice Department accused the service’s co-founders Roman Storm and Roman Semenov of laundering more than $1 billion. Storm was detained, he was released on bail but was refused to drop the criminal case, while Semenov remains at large.

Despite the sanctions, the volume of Tornado Cash deposits in the first half of 2024 alone exceeded the result for the whole of last year. Representatives of the crypto community have repeatedly criticized the authorities for arresting the developers, insisting that they are not responsible for the use of the code by attackers.

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The native token of Tornado Cash (TORN) reacted with a sharp growth to the court ruling issued on November 26. At the moment, it jumped 872% to $34,98 before correcting to $14,73 overnight. Nevertheless, the daily gain was 307%. The asset is in the 786th place in the ranking of cryptocurrencies by market capitalization with a value of $56,14 million.

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