Welcome to the Blockchain & AI Forum, where your questions are answered! Today I answer Malik’s question: “what’s the latest news in the Tornado Cash legal case”?
What is Tornado Cash. Before jumping to the answer, first a moment to understand what is Tornado Cash. Tornado Cash is a non-custodialprivacy protocol allowing permissionless shielded transactions on Ethereum and derivative networks. In plain English, Tornado Cash is an application that does not hold your crypto currency–you own it, you store it. Tornado Cash facilitates transactions on the Ethereum blockchain without requiring permission while maintaining your privacy. How does Tornado Cash maintains privacy?
Tornado Cash = Privacy. Tornado Cash achieves anonymity by breaking the on-chain link between source and destination addresses through “anonymity pools”. However, Tornado Cash does not preserve privacy by comingling assets; it uses zero knowledge cryptography. What’s more, Tornado Cash relies on Ethereum—a decentralized protocol where transactions neither can be changed or altered. Hence, nobody – including the original developers – can modify or inhibit the protocol or the transactions. What more information about how Tornado Cash works? Click How does Tornado Cash work? and Tips to remain anonymous.
What is the Office of Foreign Assets Control—OFAC. OFAC is an office within the U.S. Treasury Department. It claims to enforce economic and trade sanctions against specific countries, regimes, individuals, and entitles that pose threats to U.S. national security, foreign policy, or economy. In other words, the enemy de jour of the U.S. government. By the way, although OFAC was formally created in 1950, the use of sanctions by the U.S. government goes back to 1812!
Tornado Cash Placed on OFAC Sanction List. August 8, 2022, OFAC placed Tornado Cash on the sanctions list. According to the OFAC press release https://home.treasury.gov/news/press-releases/jy0916, “Tornado Cash, is a crypto currency mixer which has been used to launder more than $7 billion worth of virtual currency since its creation in 2019.” However, OFAC’s statement is partially incorrect on the facts. Tornado Cash is not a currency mixer nor is it property. This error, deliberate or not, is materially important as we will see in a moment. Let’s move on to what happened last week.
OFAC Removes Tornado Cash from the Sanction List. Last week, the U.S. Treasury removed Tornado Cash from its sanctions list. That’s a big deal. To understand what happened let’s take a moment to examine a recent court ruling that led to OFAC removing Tornado Cash from the sanctions list.
Last November, the 5th District Court of Appeals ruled that OFAC exceeded its authority when it put Tornado Cash on the sanctions list. Essentially, the Court of Appeals reversed an earlier decision by a lower federal court. The Court of Appeals stated the executive branch’s authority to “block ‘property’ in which a foreign ‘national’ or ‘person’ has an ‘interest’” did not apply in the case of Tornado Cash. In other words, OFAC has no jurisdiction. Why? Because the use of immutable smart contracts — lines of autonomous code on the blockchain intended to preserve anonymity in transactions — do not qualify as property and OFAC can only sanction property. And, smart contracts, despite their names, are not actually contracts. By the way, Tornado Cash’s legal fees were paid by Coinbase. Wonderful to have friends with cash!
No surprise—Tornado Cash value catapulted by 73% after the OFAC full scale retreat. The story ends with OFAC deciding to “exercise its discretion” by dropping legal actions against Tornado Cash. Lol!
Until Next Time,
Yogi Nelson
Blockchain & AI Forum 