Ending the Treasury Department’s Regulatory Overreach on Crypto Mixer Tornado Cash

by

As a seasoned crypto investor with a knack for navigating the digital jungle, I can’t help but feel a sense of relief and vindication following the recent court ruling on Tornado Cash. Having witnessed the ebb and flow of regulations and sanctions in this dynamic field, I’ve learned to appreciate the fine line between security and stifling innovation.

Users of cryptocurrencies who value their privacy had much to appreciate during the recent Thanksgiving holiday.

Two days prior to the holiday, a three-judge panel from the Fifth Circuit court, speaking with one voice, decided [law.justia.com] that the Office of Foreign Assets Control (OFAC) [ofac.treasury.gov] had gone beyond its legally defined authority and acted irrationally without sufficient evidence when it imposed sanctions on the open-source software known as Tornado Cash, rather than on the individuals who misuse it.

Essentially, Congress didn’t grant the Office of Foreign Assets Control (OFAC) the authority to enforce sanctions on software code that doesn’t belong to anyone specifically.

To clarify, Tornado Cash is a tool that complicates the tracking of cryptocurrency transactions, as previously discussed with CoinDesk. While it has legitimate and legal applications, it’s also been utilized for illicit purposes, such as by cybercriminals and potentially hostile state actors, to conceal their unlawful activities.

Due to these actions, several Tornado Cash accounts were included on the Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals and Blocked Persons (SDN) list.

However, as outlined by the applicable legal framework, the Office of Foreign Assets Control (OFAC) was granted the authority to impose sanctions on the assets, including any ownership rights, of specific individuals.

In this case, Judge Don Willett’s opinion stated that the unchangeable smart contracts under discussion weren’t considered as property, hence they fell outside the scope of sanctions by OFAC (Office of Foreign Assets Control).

The court stated that since the disputed aspect was decisive, it wasn’t necessary for them to consider the other points at hand in the case. They argued that the lower court made a mistake by giving excessive consideration to OFAC’s interpretation of ‘property’ and by concluding that immutable smart contracts fit within that definition.

Due to the U.S. Supreme Court’s Loper Bright decision from the previous term, which abolished Chevron deference – the rule that courts should defer to an agency’s interpretation of ambiguous laws or regulations – the court has decided to exercise its own discretion in interpreting what a law truly means, stating it as the “simple yet fundamental principle” of applying its own understanding.

According to the court, the term ‘property’ can be understood in its common sense meaning as well as per OFAC’s regulatory definition – items that are able to be possessed. In the specific situation discussed, the unchangeable smart contracts under consideration do not fall into this category because they cannot be owned.

Additionally, the court extended its ruling to make noteworthy observations that could potentially impact the broader realm of cryptocurrency and smart contracts.

Initially, it was stated that the smart contracts in question, though they may be named as such, do not fall under the legal definition of a contract – this contradicts the previous court’s judgment.

As an analyst, I’d rephrase it as follows: Initially, the district court considered the contracts to be a specific type of unilateral agreements that are essentially coded. However, upon review, the Fifth Circuit panel argued that this perspective overlooked fundamental principles in contract law. They pointed out that traditional contracts involve at least two parties. In contrast, these immutable smart contracts, being simply lines of code, only involve one party because they don’t represent a party that can enter into a contract with another.

The Fifth Circuit emphasized that their ruling doesn’t conflict with previous “blockchain case law,” as it has been established in other instances that certain smart contracts can indeed be considered as legal contracts due to mutual agreement between involved parties. However, in this specific case, since smart contracts are ownerless and immutable, there is no entity available for contractual agreements to take place.

In the second instance, the court decided that the smart contracts under consideration aren’t services in themselves, but rather functional tools utilized for providing a service. This distinction is significant because using a tool and providing a service are not the same thing.

Ultimately, the court emphasized that it should adhere to its designated role within our constitutional framework of government. It acknowledged the practical drawbacks when technology beyond the jurisdiction of OFAC’s sanctions isn’t regulated, but stated that it must respect the agreement made (or possibly flawed) by Congress rather than adjusting it. The court refused to participate in creating new laws by addressing the statute’s shortcomings or mitigating its disruptive impacts. It considered this action as falling outside of its jurisdiction because “making laws is the exclusive domain of Congress.

It’s uncertain if the government will request a full panel of the Fifth Circuit to reconsider their decision, or instead appeal directly to the U.S. Supreme Court. It’s worth mentioning that the Eleventh Circuit has a similar case under consideration as well. If they arrive at a contrasting verdict or justify their decision differently, this might encourage the Supreme Court to take up the case.

Undoubtedly, we’re curious about how the forthcoming Trump Administration plans to approach this issue as well. It’s possible they might concur with the viewpoint that the Biden Administration’s actions by OFAC in this particular case were unusually bold.

And, of course, Congress could always act too.

So, for now, it’s good news for the crypto community. But the story is far from over.

This article’s opinions belong to the writer and may not align with those held by CoinDesk, Inc., its proprietors, or associated entities.

Read More

2024-12-07 00:55