Syed Rahman explains why sanctions placed on the crypto tumbler were overturned
Tornado Cash’s value rose dramatically after a court overturned the sanctions that had been placed on the crypto tumbler.
In a case that may have sizeable implications for the crypto sector as a whole, a US District Court for the Western District of Texas revoked the sanctions that had been imposed by the US Treasury’s Office of Foreign Assets Control (OFAC) in 2022. The sanctions followed allegations that Tornado Cash had been used to launder over $7 billion in crypto tokens. This included $455 million allegedly stolen by North Korea’s Lazarus Group.
The court’s action was followed by the price of Tornado Cash’s native token, TORN, rising by more than 140%, from $9.5 to over $23; reflecting investors’ willingness to entrust their money to a controversial operator.
But the issues in the case may affect many other crypto operators.
The court case hinged on Tornado Cash’s core technology, which consists of smart contracts that cannot be altered or controlled by any individual or entity. The court ruled that these contracts could not be considered property under the International Emergency Economic Powers Act (IEEPA), under which OFAC imposes sanctions. As the smart contracts are unable to be changed and are decentralised, they are considered non-ownable. Specifically, the court concluded that no one, not even Tornado Cash had the ability to update, remove or control the smart contracts. As a result, they cannot be subject to the same restrictions placed on people or businesses.
Clarified
The court clarified that the US government had exceeded the bounds of its authority by attempting to regulate decentralised technologies. It is a ruling that makes it clear that OFAC does not have the power to enforce sanctions on technologies like Tornado Cash under the IEEPA, especially when these technologies are functioning autonomously without human intervention.
The court agreed with Tornado Cash that the Treasury was effectively creating new laws without the necessary approval from Congress. The ruling has significant implications for the future of blockchain technologies and how they should be regulated. There are those who will view this as a victory for the supporters of decentralisation, who place great emphasis on financial privacy in the fast-evolving digital economy.
It is certainly a case that shows both the nature of the challenge that the authorities face as they seek to regulate decentralised technologies and the arguments that are ongoing regarding if, how and why cryptocurrency should be regulated.
After the sanctions were imposed on Tornado Cash, some feared that these sanctions would be imposed on other crypto assets; most notably Bitcoin, which has also struggled with being used by malicious actors. But this ruling has eased these fears. Although it does not extend to any mutable (controllable) smart contracts and does not eliminate any potential criminal liability for individuals using Tornado Cash to launder money.
It should also be noted that the founders of Tornado Cash are still facing criminal proceedings. And the ruling is subject to appeal, which could conceivably lead to the matter going to the Supreme Court ;which tends to approach matters concerning national security very cautiously.
