On August 17, 2023, despite the support of giants such as Coinbase, a six-person team, including Ethereum core developers and Coinbase employees, accused the U.S. Department of the Treasury (OFAC) of exceeding its authority when it sanctioned Tornado Cash. Failed.

The lawsuit is in response to sanctions imposed by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) on privacy platform Tornado Cash in 2022. Previously, the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury put some addresses that interacted with the Tornado Cash protocol or related Ethereum addresses on the SDN (U.S. Specially Designated Nationals List) sanctions list.

After this sanction incident, a large number of DeFi protocols banned addresses related to Tornado Cash, the Github codebase of the founding team members was also deleted, and even its co-founder Alexey Pertsev was arrested in the Netherlands on August 12, 2022 (already Released in April 2023) on charges of concealing the flow of criminal funds and facilitating money laundering. In addition, the Tornado Cash Discord channel and the DAO governance forum were also shut down on the same day.

Reference reading: Interpretation of the most severe encryption sanctions in history: what happened to Tornado Cash》

Main motion denied

At issue is the nature and property rights of Tornado Cash.

Plaintiffs (team of six) and defendants (OFAC) had different views on the nature of Tornado Cash. The plaintiffs argued that it was a set of smart contracts, while the defendants argued that it was an organization; the plaintiffs argued that Tornado Cash had no property interest in the smart contracts, while the defendants argued the opposite.

Judge Robert Pitman of Texas, who was in charge of the case, held that,Smart contracts are like a vending machine in that smart contracts automatically perform specific predetermined tasks without additional human intervention. This fact does not affect the status of smart contracts as subordinate to a type of contract, and therefore as a type of property within the scope of the statute.

Tornado Cash promotes that smart contracts have the characteristics of unilaterally providing services (similar to vending machines), and Tornado Cash has sufficient property rights in these smart contracts.

Not only that, Robert also believes that,“Even if a smart contract is automatic and immutable, the developers and organizations behind it can still be considered a single entity and may be subject to legal liability.”

“The DAO is an entity in itself, demonstrating alignment to a common purpose through its voting members. As the government points out, this structure is no different from that of corporate shareholders, who may not intend to vote at a general meeting, but that does not It will affect the structure of the entity.

Ultimately, the plaintiffs lost outright in this particular case, with the court denying the plaintiffs motion and granting the defendants motion.

Some community members said,The previous Tornado Cash case was likely the first to sanction a piece of code as an organization.So given the specific nature of the Tornado Cash case, and the complex legal issues involving cryptocurrencies and blockchain technology, any legal decision on this matter is likely to have a significant impact on regulation and compliance in this space. This may be why this case has attracted attention.

Continue to appeal

In response to this loss, Paul Grewal, Coinbases chief legal officer, said that we still believe that it is correct to file charges with OFAC regarding the Tornado Cash incident. We have long known that a Fifth Circuit review would be required to resolve these issues, and we will continue to support their appeals.

Joseph Van Loon, Tyler Almeida, Alexander Fisher, Preston Van Loon, Kevin Vitale and Nate Welch, members of the six-member team, have yet to comment on the verdict.

When the organization was announced in September 2022, its founding declaration stated that code is speech, and freedom of speech is a right worth protecting.

Referring to previous intensive and tough regulatory events on the encryption industry such as the SEC and the US Department of Justice, the road to defending smart contracts and codes may have a long way to go.

Reference reading:

https://twitter.com/AlexanderFisher/status/1567874996235558913

https://twitter.com/BillHughesDC/status/1692256433818001792