Janet Yellen was named in her capacity as Secretary of the US Treasury, in the lawsuit against the … [+]
A Texas judge decided in favour of the sanctions of the Office of Foreign Assets Control against the blockchain privacy tool Tornado Cash. As a result of the sanctions, using this tool has become illegal for US persons and practically impossible for others.
The Coinbase-backed case claimed that the Treasury exceeded its statutory authority by overstepping the requirements of the International Emergency Economic Powers Act, a law used by OFAC to justify its sanctions against Tornado Cash. The plaintiffs also argued that the sanctions are not in line with the Free Speech Clause of the First Amendment. The court dismissed all of the plaintiffs’ motions. Here is why.
The Treasury Was Within Its Right To Sanction Tornado Cash
The government argued that Tornado Cash is an entity, which has a property interest in the smart contracts, and therefore can be designated and sanctions enforced against. The court agreed with this reasoning in three steps.
The Association Of Tornado Cash
Tornado Cash is “an entity that may be designated per OFAC regulations,” writes the court. Specifically, it finds that Tornado Cash is an association within its ordinary – and not regulatory – meaning. That entity is composed of Tornado Cash founders, developers, and a DAO (all TORN token holders), together promoting and executing the common purpose of Tornado Cash in order to profit from these activities.
The Contractual Nature Of Tornado Cash Smart Contracts
The court adds that the Treasury acted within its given power, saying “OFAC’s determination that the smart contracts constitute property, or an interest in property, is not plainly inconsistent with the regulatory definition of those terms.” That being said, the court also notes that these terms have been defined by OFAC itself in its implementing regulations, giving them a broad reach.
Contracts are an instance of property as defined by OFAC, and the question of whether smart contracts are to be considered “contracts” is a contentious point among the parties. “Not every smart contract can be considered a contract” writes the judge, but in this specific case it is considered that the smart contracts represent a unilateral offer to provide services. The judge relies on one analogy commonly used to explain smart contracts by comparing them to vending machines, which also do not require outside human intervention. As vending machines are a form of unilateral contracts, so should Tornado Cash smart contracts be, it concludes.
The Financial Interest Of Tornado Cash DAO In The Smart Contracts
Although widely argued against, the court nonetheless finds that Tornado Cash as an entity has a beneficial interest in the smart contracts because of its expectation that they continue to generate revenue for the DAO. This revenue stream in TORN tokens relates to a specific type of transactions called relayer-enabled transactions. Despite this type of transactions being optional should the user want to benefit from the added privacy they bring, it formed around 84% of all Tornado Cash transactions.
The Plaintiffs Failed To Claim And Prove Any Violation Of Their Free Speech
The court rejects any violation of free speech by the sanctions since code is available and can be lawfully analyzed and used “to teach cryptocurrency concepts,” but not executed nor transacted with. The judge states here that the plaintiffs did not claim, let alone sufficiently demonstrate, that any of them has felt inhibited to use the open-source Tornado Cash code in a lawful manner. Additionally, the judge considers that the plaintiffs have failed to cite any case sustaining that free speech protects the right of individuals to donate money to social causes of their choosing through any particular bank or service they opt for, such as Tornado Cash. Finally, the judge highlights that the plaintiffs have not explained how these specific sanctions prevent them from using other alternative on-chain privacy tools.
This judgment, although dismissive of the claims against the Treasury, gives concrete grounds for privacy-focused lawyers and technologists to build a stronger case in favour of their right to privacy. To influence the outcome of the judicial process, privacy advocates now know what to argue to correct the underlying facts, the legal principles and their interpretations on which this court’s reasoning is based.
Next Step, An Appeal To The Fifth Circuit
A loss for the plaintiffs but also for privacy and the decentralized open-source space, this may however just be a bump in the road. Coinbase’s Chief Legal Officer Paul Grewal expressed their support of an appeal to the Fifth Circuit. This does not come as a surprise given that the stakes are high and it should have always been assumed that the dismissed party in district court would play their remaining cards and appeal.
The plaintiffs are not only acting on their own account but can be assumed to defend the interests of all cryptocurrency users in the U.S. and beyond. They must now argue against the reasoning of the judge, while also taking into account and crafting other strategies that could be deployed alongside the potential appeal.
