The US Fifth Circuit Court reversed the lower court ruling to fault the Treasury for overstepping its authority to sanction Tornado Cash.
The Tuesday, November 26 decision by the US Fifth Circuit Court delivered a critical win for privacy advocates supporting blockchain developers pursuing legal clarity. The court held that the Treasury breached its authority to sanction the immutable smart contracts of Tornado Cash. The Court observed that the autonomous software hardly qualifies as property.
Fifth Circuit Faults OFAC
The Fifth Circuit pulled a masterstroke indicating that whenever smart contracts become immutable, it implies that an entity can neither modify nor control them. Consequently, such should never be classified as property and subjected to sanctions stipulated under the existing law.
The ruling clarifies the blockchain developers who sought to build similar products. Industry stalwarts consider the decision a victory for privacy advocates left vulnerable by the lower court ruling.
The court found that immutable smart contracts were at the heart of this case. It illustrated that such do not constitute property since no one can own them. Also, over 100 participants were featured in the trusted setup ceremony, thereby permanently eliminating the capability to either update or control the code.
The court held that the contracts are easily accessible to anyone. They cited the availability of the contracts to the entities sanctioned by the Office of Foreign Assets Control (OFAC). The court added that mending the blind spots or ironing out the disruptive effects is beyond its authority lane. The panel of judges indicated they declined the OFAC invitation to undertake judicial lawmaking. They equated such as revising the Congress work disguised as interpreting the provisions. They affirmed that legislating is the mandate of Congress alone and not of any other body.
The protocol running on smart contracts hardly depends on human intervention to operate. As such, the judges ruled out their classification as services since they rely on intangible commodities in human effort, including advice, skill, or labor.
The Coinbase legal executive Paul Grewal indicated that no party desires the criminals to leverage crypto protocols. He added that restricting the open source technology because a section of users are illicit actors is beyond what Congress authorized.
Grewal laments that the sanctions stretched the authority of the Treasury beyond recognition. The legal expert hails the Fifth Circuit for its decision.
Twists in Tornado Cash Case
The case traces back to August 2022 when the US Treasury sanctioned Tornado Cash, alleging it facilitated the execution of $7 billion in illicit transactions. The funds involved were attributed to the sanctioned Lazarus Group from North Korea.
The case saw Roman Strom and fellow developer Roman Semenov face charges in August last year for enabling money laundering and violating sanctions. In May this year, another developer, Alexey Pertsev, faced a 64-month sentence for laundering $1.2 billion.
The case took a twist in September last year when plaintiffs, including Joseph Van Loon, lodged appeals to challenge the sanctions leveled against Tornado Cash. The plaintiffs indicated that OFAC surpassed its mandate granted by the International Emergency Economic Powers Act (IEEPA). They questioned the designation of immutable smart contracts by Tornado Cash as “property” and subjected it to sanctions. The appeal emerged to challenge the district court ruling that upheld the actions of OFAC.
Although the appeals court faulted the classification of immutable smart contracts as sanctioned entities, the entire designation and restrictions remain intact.
ConsenSys legal executive Bill Hughes indicated on X that the case returns to the lower court to consider the merits afresh while enforcing the law. Nonetheless, the ruling applies to the self-executing code that operates without relying on administrative control. This implies that other sections of Tornado and all protocols formed from the codebase are subject to sanctions.
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